Last year, Nick Crisci felt more than ready to retire. After working nonstop for 46 years, the 69-year-old feared the stress of his information technology job was affecting his health. Crisci, who lives in Pflugerville, Tex., prepared for retirement by whipping his finances into shape—paying off his mortgage and shifting some of his investments into Treasury bills to create a cash cushion. He also envisioned how he’d spend his days in retirement: gardening, reading, playing with his grandkids and working on his stamp collection.
But all that preparation didn’t make the transition easy. Since his November 2018 retirement, he has focused on staying busy, getting involved with his homeowners association, joining a senior community center and taking tai chi classes. But “it’s not fun yet,” he says. “I feel tired, not retired.” And the recent market downturn has further undermined his confidence. “I’m sitting here thinking, ‘How long will it take to recover from this?’ ” he says. “Did I pick the wrong time to retire?”
Even with years of preparation, retirement can be a daunting prospect. Can your portfolio withstand a market crash in your early retirement years? Will you still have a sense of purpose when you’re no longer heading to the office every day? How do you know that you’re really ready—both financially and mentally?
To ensure a successful retirement transition, you’ll need to tackle those questions and many more. But the process doesn’t have to be intimidating. Follow these eight steps to ensure you’re prepared—financially and mentally—to retire.
Step 1. Envision Your Next Chapter
As retirement planning becomes more complicated, many older workers are failing to make even the most basic preparations. Only about 60% of workers 55 and older have thought about how they’ll occupy their time in retirement, according to a 2018 survey by the Employee Benefit Research Institute, and less than half have estimated their retirement expenses.
Picture your day-to-day life in retirement. Perhaps you’ll work part-time, volunteer, spend time with family and friends—or even continue working full-time with the knowledge that you have the financial independence to take or leave the working world as you please. For many clients, “full-time retirement turns out to be a sabbatical,” says Michael Kitces, a partner at Pinnacle Advisory Group, in Columbia, Md. “Three to six months in, they’re bored and want something to do for the next 29½ years.”
Find a “retirement mentor”—a current retiree who seems engaged and fulfilled, suggests Catherine Collinson, chief executive officer and president of the Transamerica Center for Retirement Studies. Take that person out for lunch to talk about the retirement-planning process. Also check out online resources such as Encore.org, which can help generate ideas for finding purpose in retirement.
Step 2. Size Up Income and Expenses
When you know how you will spend your time in retirement, you’ll have a much better idea of how you will spend your money—and whether you can generate enough income to pay the bills.
Create a budget, dividing expenses into discretionary and nondiscretionary categories. Make sure you’re realistic about the cost of essentials such as health care. When Crisci signed up for Medicare last year, for example, he didn’t realize he’d be subject to income-related surcharges—so his premiums are hundreds of dollars per month higher than he anticipated. “That was a shocking lesson for me,” he says.
Aim to generate enough guaranteed retirement income to pay for must-haves such as food, shelter and health care. That way, you’ll know that your essentials are covered even in a prolonged market downturn. Maximizing Social Security, a critical source of inflation-adjusted lifetime income, should be your “first priority,” says financial planner Joe Tomlinson. Consider services such as Maximize My Social Security, which costs $40 a year, to hone your claiming strategy. For more ideas on maximizing guaranteed lifetime income, see “Keys to Lock in Lifetime Retirement Income.”
Step 3. Find a Flexible Spending Strategy
The more guaranteed income you have, the more flexible you can be with your portfolio withdrawals. And that flexibility may be the key to surviving a bear market in your early retirement years.
Consider this example from T. Rowe Price: An individual retires at the start of 1973 (the most recent 30-year period that began with a bear market) with a $500,000 portfolio composed of 60% stocks and 40% bonds. If he follows the 4% rule—withdrawing 4% of his portfolio in the first year of retirement and adjusting that dollar amount for inflation each year thereafter—his portfolio suffers a hair-raising decline to $328,500 by September 1974 and recovers to about $1.1 million at the end of 30 years.
But a temporary spending adjustment can drastically improve the scenario. The retiree could hold spending steady when his original portfolio value drops 30%, foregoing inflation adjustments in 1975 and 1976. He would never have to take another spending cut, and after 30 years, his portfolio would grow to nearly $2.4 million, giving him much greater spending flexibility in his later retirement years.
“If you can manage your spending during down markets, that’s going to have a greater impact than trying to change your asset allocation,” says Judith Ward, senior financial planner at T. Rowe Price. Review your nonessential expenses and decide which ones can be easily trimmed in a pinch. That way, “you don’t have to panic” when you need to cut spending, Ward says.
Step 4. Tame Market Jitters
In early 2017, Fritz Gilbert was financially ready to retire from his career in the aluminum industry. But he came down with a case of “one more year syndrome”—delaying his retirement in part because he feared a market crash. “The market has been so hot for so long,” says Gilbert, who lives in Blue Ridge, Ga., and blogs about retirement at TheRetirementManifesto.com. Working one extra year, he says, was “a buffer in case of a significant downturn” in early retirement.
The bull market is approaching its 10th birthday, and stocks have swung wildly in recent months. Such ominous market signals can cause many older workers to cling to their jobs, even when they’re financially prepared for retirement and eager to call it quits.
But does the aging bull market really make this a terrible time to retire? “Not necessarily,” Kitces says. “You can retire on the eve of the Great Depression, and as long as you don’t spend excessively, it goes fine.”
Gilbert, age 55, finally retired in June 2018—fully armed with a flexible spending approach and other strategies to tame his market jitters. He’s withdrawing a conservative 3% of his portfolio annually, and he’s willing to vary that based on his investment returns. He keeps three years’ worth of living expenses in cash and near-cash holdings such as certificates of deposit and short-term bond funds. Although that may crimp his returns, “the reduction of anxiety about dipping into equities in a downturn is worth it,” Gilbert says.
Kitces suggests another approach to address “sequence of returns” risk—the possibility that poor returns in early retirement will decimate your portfolio. Take shelter in a “bond tent.” In the decade leading up to retirement, gradually increase your bond stake to as much as 60% or even 70% at your retirement date. You can then spend down your bond reserve in the early retirement years, arriving back at a 50% bond allocation perhaps 10 or 15 years into retirement. Stick with high-quality short- and intermediate-term bonds. “The job of the bonds is not to make the returns,” he says, but rather “not to lose money in a bear market.”
Step 5. Plug the Leaks
Even when it seems your portfolio can keep you afloat for 30 years or more, insidious leaks can sink your retirement before it even starts.
To ensure your retirement plan is ship-shape, pay off any high interest debt. Carrying a mortgage into retirement may make sense, depending on the terms of your loan, but if you’re struggling to pay down credit card and other costly debt, that’s “the ultimate sanity check” that should prompt you to rethink the timing of your retirement, Collinson says.
Avoid taking on new debt in your fifties and sixties—such as co-signing student loans for children or grandchildren. And if you’re providing other forms of financial support to your adult children, “make sure to let them know it’s going to stop, as part of your retirement planning,” says Brad Klontz, a financial psychologist and associate professor at Creighton University.
Step 6. Try Before You Buy
Retirement is one of the biggest financial decisions you’ll ever make—so take it for a spin before you commit. If you plan to volunteer or work part-time in retirement, test it out now. During weekends, vacations or a sabbatical from work, focus on the hobbies or other activities that you hope will fill your days in retirement.
A retirement test-run is a great opportunity for spouses to talk with each other about how they envision retirement—and figure out whether they can stand to be in the house together. If your spouse’s retirement vision differs radically from yours, look for ways to meet both partners’ goals or at least find a compromise, Klontz says. If your spouse wants to drive a Winnebago across the U.S. but you’re a homebody, he says, maybe you could just go along for part of the ride, or your spouse could go with a friend.
Two years before he retired, Gilbert took a retirement test-drive over a period of roughly two weeks. The biggest thing he and his wife learned, he says, is “the importance of having together time and alone time.” In retirement, he says, they do certain things together, such as charity work and camping, but each spouse also pursues individual hobbies.
A “practice retirement” can also help you solidify your financial preparations for retirement, Ward says. The idea is to continue working but stop contributing to your retirement accounts—using that money instead either for the fun activities that you plan to pursue in retirement or to pay down debt. “Start playing a little,” Ward says, “but stay in the work force and have that safety net instead of calling it a day.”
Step 7. Expect the Unexpected
Even the best-laid retirement plans are subject to change. Only one in three current retirees retired when they had planned, according to recent research by the Transamerica Center for Retirement Studies. More than half retired sooner than expected, often because of job loss or health problems.
Have a contingency plan in case you need to retire earlier than expected. If you lose your job in the years leading up to retirement, for example, it may be difficult to find a job at the same salary level—but any job, even part-time, may significantly boost your retirement prospects. “Most people drastically underestimate the financial benefits of even a modest amount of part-time work in retirement,” Kitces says. A job that pays just a third of your old salary, he says, can help you draw less from your portfolio and delay claiming Social Security.
Step 8. Get Busy
Perhaps you’ve spent your entire working life looking forward to doing nothing in retirement. What if, when those days of leisure finally arrive, you’re miserable?
At work, “you’re immersed in what you’re doing,” Klontz says. “You become less self-conscious. And the research is so clear on this: We’re actually happier at work than on the weekends,” when stretches of unstructured time may drag us down.
No wonder so many people are redefining retirement to include full- or part-time work, volunteering and other pursuits. After 24 years at IBM, Alan Crudden of Austin, Tex., was enjoying his work less and less. He took an early buyout in 2005, with a clear plan: to get his MBA and start teaching.
Now Crudden teaches business courses at various universities, and in his off hours, he still has time to broaden his horizons. “The great thing is I’ve been able to pick my own hours,” says Crudden, age 64. “And I’m interacting with a wider variety of people, and I find that much more enjoyable.” He’ll keep teaching “as long as there’s an opportunity,” he says, but he has also developed new passions. He has become involved in local political campaigns, and he plans to take some additional college courses.
“Idleness is not a natural state for human beings,” Kitces says. The key question for those who have enough money to retire, he says, is “what are you going to do now?”
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