As we approach the latter years of our career, thoughts of what retirement will look like can be a source of mixed emotions. For many, this will be a time to dream about doing those things on their bucket list they’ve been waiting to do. It could be traveling abroad, learning a fun hobby, making memories with grandchildren, or pursuing a new business venture. For others, this could also be a time of stress and uncertainly, given how much of our identity has been tied to our career success and advancement.
We have routines and structures that we have followed for years, and now we face the reality that is all about to change.
For most approaching this next phase of life, there are four questions that will keep people awake at night searching for answers. Over the years, I’ve found that these four questions can encompass what many pre-retirees feel the need to know and be prepared for. Knowing the answers to these questions can provide confidence that people are prepared to make this a good transition.
Question No. 1: When Can I Retire?
This seems like one of the most universal questions everyone will ask themselves at some point, but how do we actually know when we should begin this next phase of life? Do we seek direction from friends, family and colleagues to help guide us? Maybe it’s our health that dictates our decision.
Back in our parents’ (or grandparents’) day, life seemed much simpler, and this question may have been easier to answer. Work for 40-50 years (many times for the same company), make a pension election when eligible, file for Social Security, and ride off into the sunset. However, with the traditional pension becoming more a thing of the past, the answer may not be so obvious today. In addition, don’t overlook the emotional piece of retirement. Studies show that the happiest people in retirement will be retiring “to” something vs. retiring “from” something. Having, on average, three to four pursuits in retirement can bring purpose and meaning to daily life. As your retirement window approaches, brainstorm each week about what pursuits you may enjoy and allow yourself to look forward to getting started. Let your mind dream big and don’t be afraid to try something you never thought you would do. Go for it!!
Question No. 2: Will I Have Enough Money?
What is that “magic number” that makes it OK to retire? More importantly, what is YOUR “magic number.” Emotionally, it can be tied to a vision you’ve had your entire career, such as accumulating $1 million or paying off your mortgage. Maybe it’s selling a business you’ve worked years to build or inheriting a large lump sum.
However, there is certainly no one-size-fits-all answer to this question. Begin by having a budget specific to retirement and understand what percentage of your monthly expenses can be covered by fixed sources of income, such as Social Security, pension, annuities, etc. The closer this percentage is to 100, the better.
Also, make sure to separate the purpose of your money and specifically dedicate it to such things as creating monthly income, covering future health care costs, and growth to outpace inflation. By separating the purpose of your nest egg, you will be better able to allocate your portfolio appropriately among various tools, such as savings, investments, annuities and life insurance to name just a few.
Question No. 3: Will It Last?
Will my nest egg last throughout retirement? One of the most significant risks for retirees is having negative returns in their investment portfolio during their early years of retirement. Unlike your working years, when you may have been contributing money to your retirement plan on a regular basis, now the opposite may occur, where monthly withdrawals may be necessary to generate needed income. This is referred to as a Sequence of Returns Risk, where the order in which the annual returns hit a portfolio matters significantly. You can see the difference in outcomes from the example below, when the average annual rate of return is the same for each portfolio but the order in which the returns happen is reversed.
The best way to manage this risk is to avoid taking systematic distributions from a fluctuating account. Dedicate a portion of your portfolio to create the monthly income needed to cover fixed expenses that are beyond what your Social Security and pension will provide. Once you know this number, you are ready to determine what combination of investments and insurance tools are right for you.
Question No. 4: Will They Be OK?
This is especially relevant for most couples. We all want to know that if we pass away, our spouse will be OK and will be able to carry on. It’s even more important to know the answer to this question if the spouse who passes first was the one who took care of overseeing all the family finances. Most often, one person in the relationship takes on this responsibility, which can provide organization and sense of order in the household. However, it’s essential to ensure that both spouses are comfortable with the family adviser and where to turn when life happens. Trust can take years to develop, so make this a priority while you are both healthy and able. Meet often enough to develop the trust needed for both partners to feel comfortable.
Knowing the answers to these four questions can provide the foundation for an amazing retirement.
*Sample Portfolio-This illustration is hypothetical only. It is not intended to represent any particular investment or performance. The above spreadsheet is for illustrative purposes only and does not represent any specific investment recommendation. Investing involves risk and loss of principal. Past performance is no guaran1ee of future results. A hypothetical investment in the Vanguard 500 Index Inv (VFINX) assumes an account date beginning on the first trading day of 2000 and held through the last trading day of 2018. It is assumed that any dividends and other earnings are reinvested and no allowances for external advisory fees have been made. The results may vary significantly if the beginning day/and or the ending day is altered. The holdings comprising the fund have changed over time and are likely to change in the future. Vanguard is the net returns from the Vanguard S&P 500 mutual fund, VFINX. Returns are sourced from http://finance.yahoo.com. It is believed to be accurate but has not been independently verified by our firm. Examples are shown to illustrate impact of volatility only.
Investment Advisory Services offered through Trek Financial, LLC, (Trek) an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 21-115.
Nicholas Toman, CFP®, is a lead retirement planner and investment adviser with Empowered Financial Management, a firm that specializes in retirement planning for those individuals within five to seven years of retirement or who have recently retired and no longer wish to serve as their own financial adviser. Nicholas is a graduate of the University of Wisconsin-Whitewater with a BBA in accounting and has been a Certified Financial Planner since 2014.
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