It is not at all uncommon for people looking to retire in the not-too-distant future to question whether they can actually afford to retire. In the absence of a clear understanding of what their future retirement income will look like, most of those folks hoping to retire will simply choose to work longer out of fear of the unknown.
This is similar to when those who are already retired live too frugally to enjoy their retirement because they just don't know how much they can safely afford to spend. Therefore, they err on the side of caution and underspend.
Many times, the fear of not knowing if they can afford to retire is compounded when markets are close to all-time highs, like they are right now. The concern is that if (when) the markets correct, they won't have as much money as they do now, and they are already nervous about having enough retirement savings to live on today, let alone if the market drops 20%-30%.
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First Things First: Figure Your Social Security
So how do you know if you'll have enough? First, log onto SSA.gov and set up an account to view your current Social Security statement. You'll want to know what you can expect as a monthly benefit. Don't forget that you will likely need to reduce that number somewhat to account for Medicare Part B premiums, taxes, etc. If you are married, then you will want your spouse to do the same.
Once you have these figures, you can determine what each of you can expect as a monthly benefit. Sometimes you might find that 50% of your spouse’s benefit is higher than your own. If that's the case, you get the higher of those options (this assumes a full retirement age benefit — claiming earlier or later affects those numbers).
Many times near retirees underestimate what their Social Security benefits will be in retirement, which causes them to question if they can afford to retire.
Next, Take Stock of Your Portfolio
Now that we know what your benefits will be, we need to look at your investment portfolio. We caution people not to assume that a very conservative portfolio is better in retirement than a moderately aggressive one. The reality is that with interest rates as low as they are, simply moving everything into very low-risk investments might not get you the income you require. Likewise, you can't just "keep doing what you've been doing" either. Changes to the portfolio will likely need to be made.
I would advise that removing several years' worth of required income from the stock market may be a good idea to protect your retirement income against a large market correction in the early years of retirement. This can help mitigate sequence of return risk. The order — or sequence — of investment returns experienced throughout retirement can have a big impact on your portfolio's value over time. If you have to pull money out while stocks are falling, especially early in retirement, it can cause a deficit that's tough or even impossible to overcome. If you are able to reduce your sequence of return risk, then you may be able to spend a larger percentage of your portfolio each year than if you don't protect against that risk.
Finally, Examine Your Expenses
Lastly, it's important to understand what you actually need to spend in retirement. While many expenses may go down, such as health care premiums, 401(k) contributions, commuting costs, etc., others may go up. Now that you have more free time than you had while you were working, expenses such as dining out, travel, recreational activities and others may likely increase.
Getting your hands around what you will need to spend and know where you can cut expenses is really important before retiring. Don't worry if you aren't 100% sure what that required monthly income need is. The reality is that it will change every few years as your retirement evolves. Just have a good idea of what you absolutely need for fixed expenses, and an idea of what you'd like to have for fun, entertainment, travel, etc.
Many times, once people considering retirement go through this exercise, they start to get a clearer picture of what retirement might look like and be in a better position to make an educated decision about whether or not they can afford to retire.
Don't hesitate to have your financial adviser or even your CPA help you with some of these calculations. The more informed you are, the better the decisions you can make about your upcoming retirement.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax adviser with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
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