Real World Retirement Planning
A year ago, I wrote a blog article on financial planning being a process and not a destination. I focused on how some people or their advisers tend to create a number for themselves; a magic number that says, “You’re going to be alright in retirement.”
The truth is there is no “magic number” when planning for retirement. There is just preparation and willingness to adjust to situations. Life doesn’t hand us all the same opportunities and retirement planning is now different than it was a few decades ago. Pensions are almost non-existent, there’s uncertainty in Social Security benefits and whether it’ll be there or not, and people are living longer.
So what are some of the things to consider when planning for retirement? I think people should be focusing on both the personal and financial aspects of this major life transition.
Where will you Live? - Where you live during retirement plays a big role in planning; consider the cost of living in an area. If you were late into the retirement savings game, you may want to consider an area with lower cost of living; this allows you to stretch your dollars more than they would in areas with higher costs. Whether you decide to move domestically or internationally, it’s a big deal to move from your home of many years to another area, so cost shouldn’t be the only consideration. One should also consider the potential cultural differences a new location may bring. Picture who your neighbors will be, what the city has to offer, crime rates, traffic etc… Do some research and visit for a few weeks or a few months as you get closer to the day you call retirement.
What will you do with free time? – Before you retire, you should also consider what you will do with your free time. If you move to a new area, is it close to your family? Next to a beach? Will you get involved in charity work? Many pre-retirees look forward to having all the free time in the world, but few can answer what they will do with their free time. Having free time is only as good as you make it out to be. So if you don’t develop hobbies or plan on how to use your free time, you may have an uneventful retirement prompting you to want to go back to work.
Will you work? – This is a question that many pre-retirees associate with need. However, retirement doesn’t necessarily mean stop working. For some it means working at will. Many retirees take on work to give them purpose. My Mother, for example, is a cake decorator at Wal-Mart. She loves what she does. She’s decided that she will continue to work throughout her retirement because it gives her reason to get up in the morning. I personally think that may change once she has more grand babies, but for now that’s her plan. For those who are getting closer to retirement, consider doing something you love or have always wanted to do and dive into it.
What is your baseline budget? - Everyone knows or should know that a budget is the foundation to financial success. When considering retirement, having some sort of idea of what you spend monthly or annually can only help paint a clearer picture of what retirement looks like. A baseline budget should include basic living expenses like home expenses, food, utilities etc. Things like vacations, travel, gifts should be extra because let’s face it, if you had to decide between paying for your child’s wedding or not running out of money for a few years (considering growth & interest earned on a $60,000 wedding), I think most of us would choose the latter. The earlier in life you start budgeting, the more data you have on what you are comfortable living with.
Where will you pull money from? – Where you pull money from during retirement factors into how much you’ll pay in taxes and how long your money will last. Mathematically speaking, the most efficient way to withdraw money for retirement is taxable accounts first, pre-tax retirement accounts, and lastly tax free accounts. When planning for retirement, the classic 4% Withdrawal Rule should not be used. Can you imagine someone retiring with $300,000? Four percent equates to $12,000; that’s not enough money to live on. Instead, consider your pensions, social security benefits, inherited retirement accounts, and annuities; these types of accounts & benefits you receive will give you a clearer understanding of how much to withdraw from savings year to year.
Will you outlive your savings? – One of the biggest concerns that anyone saving for retirement has is whether they’ll run out of money or not. It’s a valid concern to have and when one plans for retirement, it should not be a one-time deal. Life continuously changes for everyone so the magic retirement number that some advisers try to sell you on, changes as well. Consider revisiting your retirement plan every few years as a major life event occurs. Don't settle for a pre-set value and think everything will be okay if you just aim for that number.
MyLife Financial is a fee-only financial advisory firm providing objective and independent advice virtually. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.
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