Retirement is an exciting time, full of possibilities. If you want to make the most of this potentially magical life stage, it’s important to be prepared. To borrow from a poster that once hung in virtually every break room in America, the best way to ensure a great retirement is to plan your work and work your plan.
With that cliché ringing in your ears, here are the five biggest issues you need to address before you hand over your office key and parking pass.
1. Make sure you have enough money to retire comfortably.
Answering this question will depend on your unique set of circumstances, lifestyle, and expectations.
If you already have a retirement budget in place, consider taking some time to revisit it to ensure your projected spending still matches your expected income. If, for example, you have your eye on a lake house or expect to take four trips per year in retirement, make sure your income can fund that lifestyle before you jump into it.
It’s also prudent to have an emergency reserve built up for those unforeseen costs that life throws our way – home repairs, a new car, needy adult children, etc.
When thinking about how much you need and how much you have, remember our $1,000 bucks-a-month guideline, which projects you need $240,000 in assets for every $1,000 per month income you want in retirement, assuming a 5% dividend yield. Once you know your projected (and desired) spending level, you can work backward from there to make sure your assets and income streams can support your lifestyle.
2. Understand your investment strategy.
What do I mean by this one? In a nutshell, you should understand your risk tolerance, the amount of investment risk you are willing to withstand, which is often influenced by where you are on your retirement timeline. If, for instance, you have 20 or more years until you’re ready to call it a career, you probably have more risk tolerance than someone looking to retire in a handful of years. Understanding your individual risk tolerance is the blueprint for how you allocate your portfolio.
I’m a strong proponent of income investing. This strategy is a balanced way to capture both the growth and income components of your well-rounded portfolio. For those with more risk tolerance and more time, you could put more focus on capital appreciation. And there are always alternative investments and real estate for those who understand that you may not generate your expected return, or you may generate more and can live with that level of uncertainty.
3. Prepare for the psychological changes that come with retirement.
People often find they are scared to make withdrawals from their nest egg – no matter how large. When you stop saving and start using your retirement money, it’s a different emotional ball game. People worry that they’ll run out of money. I’ve heard this fear from people with $500,000 in savings and folks blessed with $5 million in assets.
The fix is to educate yourself (or better yet, work with a professional) on the basics of income investing. Practice prudence with your withdrawals and consider following the 4% Rule. My firm recently tested William Bengen’s original study and found that 70% of the time portfolios last 50 years using the 4% Rule. Stay the course and, if you are prudent in your spending, you should enjoy many years of financial security.
4. Have plans for your newfound time.
While we typically talk about retirement from a financial perspective, it’s a personal journey, too. New retirees sometimes find themselves with too much free time on their hands.
You can avoid this problem by making time over the years to explore and develop hobbies and other passions. At Capital Investment Advisors, we call these activities “core pursuits.” Spend your time doing what you love, and you’ll be using your free time to the fullest – whether you’re golfing, gardening, volunteering or working a part-time job that taps your expertise and interest. What you do matters far less than the fact that you’re engaging with something.
5. Have a plan in place for the natural process of aging.
Getting older isn’t for sissies. We need to plan for the curve balls aging will inevitably throw us – expensive medications, visits with specialists, even long-term care. Make sure that you are prepared for these types of costs and more.
We talked about budgeting above, so here I want to focus on the documents that you should have in place when you retire. Heck, I even tell my clients who are in their 30s they need these documents. They are that important.
Consider executing an estate plan that includes a simple will, financial power of attorney, and advance directive for health care. The will is so you direct where your property will go when you die so that you have a say rather than the laws of the state in which you live charting the course.
The financial power of attorney and advance directive for health care allows you to determine who is allowed to care for your finances and make health care decisions in your place in the event you are unable to do so. Think of these documents as you think of insurance policies; you may never need them, but it’s good to have them if you ever do.
One final thing to consider is long-term care insurance. Long-term care can be expensive. Remember, Medicare doesn’t pay for extended stays in nursing homes. So, this insurance could save you from a budget-shattering expense. Working with a healthcare professional like Shop Benefits or US Health Advisors can help you weigh out these options.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. The information contained in this piece is not considered investment advice or recommendation or an endorsement of any particular security. Further, the mention of any specific security is solely provided as an example for informational purposes only and should not be construed as a recommendation to buy or sell. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.