“What do you mean we should work longer?” This is a common expression we hear when clients decide they want to move up their retirement date but don’t quite have key foundational pieces in place. Shifting from the accumulation phase (saving for your future goals) to the distribution phase (spending down assets to replace your paycheck) requires thoughtful planning. Before you walk away from that job for good, let me share some common challenges we encounter as we help clients prepare for this important transition.
If you want to sabotage your retirement, ignore these:
Consumer Debt: It doesn’t matter if it is at zero percent interest, it can eventually cost you! Consider this: If you can’t pay it off now with earned income, what makes you think it will be any easier when you’re living off your assets? Additionally, if you still carry long-term balances into retirement, it’s usually a warning sign you are living beyond your means.
Overspending: There is a common disconnect between spending projections and actual spending behavior. Think you can live on $$$? Great! Practice living on that amount for at least six months and see how it works. Too restrictive? Consider what that will feel like for the next 30-plus years. And be aware that the first few years in retirement can be very expensive as you fill your time with things you’ve not been able to do because of work.
Withdrawing too much too fast: It doesn’t take very long to deplete even a significant portfolio if you withdraw too much too fast, especially in the early years. Add volatile markets or flat years to the mix, and the odds of outliving your portfolio assets goes up exponentially.
Life expectancy: People often balk when we talk about planning well into their mid-90s, but there has been a dramatic increase in the average life expectancy. I don’t see this changing, given our medical and technological advances.
Inflation: We’ve been in a low-interest rate environment for quite some time but it wasn’t that long ago when inflation was more than 6 percent for 20-year periods. Don’t underestimate what can happen to your purchasing power if inflation edges up and again becomes a major challenge to a retiree.
Social Security. Just because you are eligible to file does not mean it is the optimal time to file. Many variables go into making a wise decision with this important asset. Be sure you consider all the angles before your election.
If you want an enjoyable retirement later, here’s what to consider now:
- Have a good job? Think carefully before walking away. Consider easing into retirement by stepping down to part-time work.
- Have consumer debt? Pay it off before you resign.
- Have mortgage debt? Pay it off while you still have a paycheck. From our experience, clients who retire free of a mortgage seem to enjoy their retirement more than those who don’t.
- Have a retirement spending plan? Practice living on it for at least six months before you walk away from your job. And don’t forget to include things like additional travel, hobbies, major home repairs or saving for a replacement vehicle.
- Have a plan for major medical expenses? Medical, dental and long-term care expenses are typically higher than anticipated and usually not covered by traditional insurance or Medicare. Evaluate how you plan to handle this vital need.
- Have a focus? Since our western version of retirement is more a traditional rather than biblical concept, we always ask people to tell us what they are going to retire TO before they retire FROM the workforce. Missing interactions with colleagues, feeling aimless with less routine or finding it difficult to feel a sense of meaning and purpose in daily life are common themes that surface a few years into retirement if there has been no life planning for this important stage. Exploring a new hobby, serving in a non-profit, or cultivating a long-suppressed passion can lead to greater retirement fulfillment. Just be sure to plan for the cash flow needed to allow you to enjoy these endeavors.
Answering the “Can I retire yet” question requires examining a complex set of variables. What you don’t know now can definitely hurt you later. No two retirement plans look alike—situations are unique and so are the solutions. If you haven’t yet done retirement planning, start now while you can do something about it!
— by Janice Thompson
Thompson is a certified financial planner, and co-founder and CEO of One Degree Advisors, Inc. She speaks on financial topics and is a mentor for financial professionals, she also serves on the board of directors for Kingdom Advisors. Learn more at onedegreeadvisors.com. Advisory services offered through One Degree Advisors, Inc. Securities offered through Securities America, Inc., Member FINRA/SIPC. One Degree Advisors and Securities America are separate companies.