Time has flown. The possibility of retirement, which seemed as far as the setting sun on a drive home from work maybe 30 years ago, now looks much closer to your windshield.
But you may not be quite so sure when you’ll be ready to call it a career. Some people make the mistake of thinking they’re ready for retirement when they are not. They take the leap but find out retirement isn’t as carefree as they imagined, primarily because their retirement plan, or a haphazard version of one, had critical gaps and didn’t sufficiently cover their needs and wants.
If you’re getting close to putting your work life behind you, make sure you give all of the financial implications of that big step a thorough analysis. Here are five important factors to consider when determining whether or not you’re retirement-ready:
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It’s all about your lifestyle
Know what you want in retirement, where you want to go, what you want to do, and most importantly, how you want to feel when you do it — confident, secure, free and in control.
Here’s an example: Look ahead into the early stage of your retirement, and let’s say you’re taking a dream trip to Italy. You’re there two weeks, but you’re always thinking about money when you’re there — either what your money is doing for you in investment accounts or how much you’re spending. So you’re worried, and you’re not fully enjoying this dream trip.
Perhaps you’re good at tabling all those thoughts and emotions while traveling but then return to concerns about how much you spent or how your investments are doing. This is evidence of not having planned well.
The same concept applies in retirement when going out to dinner, buying a nice gift or considering your next car purchase: If you’re worried about the expense and wondering whether you can afford to do the things you’ve always wanted to do, then you’re not experiencing retirement as it was intended.
Having predictable income and cash flow is essential
These are the key drivers of an enjoyable retirement lifestyle. Many people in the previous generation retired with a pension and Social Security, and those income sources covered the majority, if not all, of their lifestyle needs. But today, savings is what drives the retirement lifestyle. Few people today receive pensions, the cost of living is higher, Social Security barely covers needs, much less the wants, and many retirees today want to go more places and do more things — all of which costs more.
What you need to do is create some predictable cash flow to cover the majority of your lifestyle needs or essential lifestyle. Without predictable cash flow, you’ll be setting yourself up for a variable lifestyle in retirement that’s really based on the variability of the volatile markets.
Even if you’re diversified in the stock market, bond market, commodities market or international market, without predictable cash flow, your lifestyle will ebb and flow with their fluctuations. When times are good, you’ll have more to spend, but when times are bad, you’ll feel the pressure to spend less. This might mean putting a trip on hold or even canceling a dream vacation.
Most retirees don’t want to experience retirement with a variability to their lifestyle. There are various types of investment and insurance products that qualified financial professionals can explain to you that can have downside market protection, upside opportunity and predictable cash flow options.
You can’t afford to forget about taxes
Many of the free online retirement calculators people use when analyzing their retirement readiness can be misleading. For instance, these calculators will ask for an account balance, leading people to think that the balance shows the exact amount of money they have to use, which is often not the case. The net of tax value — the amount left after taxes have been subtracted — is your real actual balance. The calculators are using the gross, or before-tax-balance, amount to run simulations for your retirement future. But it is the after-tax amount that you have available to use for your lifestyle.
A half-million dollars showing as an account balance in a 401(k) may really be only approximately $350,000 after taxes. In contrast, a $500,000 balance showing on a Roth account is exactly what you have available to spend because it is not subject to taxes when withdrawn, as long as it’s been at least five years since you first contributed to the account and you are 59½ or older.
The bottom line is when planning for retirement, where you put your money and how you invest it based on the type of tax treatment of the account can have a significant implication on your retirement.
Investing is about more than risk tolerance
It’s a common question from brokers: “What is your risk tolerance?” In the real world, when times are good, people tend to say they can handle more; when times are not good, many people tend to be much more risk-averse. Most fall somewhere in the middle, ending up with a moderated portfolio that does not help much in good times and can be more detrimental in bad times.
Give thought to what you really own and why you own it. Do you even really understand what you own and why you own it, or when you’ll use which portion of your money? If one area of your money is for a short-time horizon, then you need to think about that differently than money you don’t need for 10 years. That approach gets around this generic risk tolerance, where people take all their accounts, pull them together and treat all that money exactly the same, which doesn’t lead to sound investment expectations.
Integrative planning weaves all the financial elements together
A smart retirement plan helps you get what you want, addresses your concerns and reveals opportunities with integrating income, investing, taxes, protection and legacy. An integrated plan should optimize your resources in the short term and maximize your savings over the long term. It provides a customized framework and flexibility for using your money wisely in the dynamic situation that retirement is. An integrated plan is purposeful and provides peace of mind rather than just having a portfolio or buying a financial product that can be made to maybe only sound good at the time.
There are always going to be uncertainties in retirement. But keeping these key points in mind will inform your decisions on how best to navigate it — and enjoy it.
Dan Dunkin contributed to this article.
Disclaimer
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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