As we approach the latter years of our career, thoughts of what retirement will look like can be a source of mixed emotions.
For many, this will be a time to dream about doing those things on their bucket list they’ve been waiting to do. It could be traveling abroad, learning a fun hobby, making memories with grandchildren or pursuing a new business venture. For others, this could also be a time of stress and uncertainty, given how much of our identity has been tied to our career success and advancement.
We have routines and structures that we have followed for years, and now we face the reality that that is all about to change.
For people approaching this next phase of life, there are four questions that will keep people awake at night as they search for answers. Over the years, I’ve found that these four questions can encompass what many pre-retirees feel the need to know and be prepared for. Knowing the answers to these questions can provide confidence that people are prepared to make this a good transition.
Question #1: When can I retire?
This seems like one of the most universal questions everyone will ask themselves at some point, but how do we actually know when we should begin this next phase of life? Do we seek direction from friends, family and colleagues to help guide us? Maybe it’s our health that dictates our decision.
Back in our parents’ (or grandparents’) day, life seemed much simpler, and this question might have been easier to answer. Work for 40 to 50 years often for the same company), make a pension election when eligible, file for Social Security and ride off into the sunset.
However, with the traditional pension becoming more a thing of the past, the answer may not be so obvious today. In addition, don’t overlook the emotional piece of retirement. The happiest people in retirement retire “to” something vs retiring “from” something.
Having, on average, three to four pursuits can prevent boredom in retirement and bring purpose and meaning to daily life. As your retirement window approaches, brainstorm each week about what pursuits you may enjoy and allow yourself to look forward to getting started. Let your mind dream big and don’t be afraid to try something you never thought you would do. Go for it!
Question #2: Will I have enough money?
What is the magic number that makes it OK to retire? More important, what is your magic number? Emotionally, it can be tied to a vision you’ve had your entire career, such as accumulating $1 million or paying off your mortgage. Maybe it’s selling a business you’ve worked years to build or inheriting a large lump sum.
However, there is certainly no one-size-fits-all answer to this question. Begin by having a budget specific to retirement and understand what percentage of your monthly expenses can be covered by fixed sources of income, such as Social Security, a pension, annuities, etc.
Also, make sure to separate the purpose of your money and specifically dedicate it to such things as creating monthly income, covering future health care costs and growth to try to outpace inflation. By separating the purpose of your nest egg, you will be better able to allocate your portfolio appropriately among various tools, such as savings, investments, annuities and life insurance, to name just a few.
Question #3: Will my money last?
Will my nest egg last throughout retirement? A possible risk for retirees is the potential of having negative returns in their investment portfolio during their early years of retirement.
During your working years, you may have regularly contributed money to your retirement plan. Now, as you enter retirement, you might instead need to consider making regular withdrawals from these savings to generate income.
This is referred to as a sequence of returns risk, and the potential impact on the order of yearly gains and losses could have on a retirement portfolio. For example, early negative returns, particularly in the first few years of retirement, could affect how long savings last while also making withdrawals for income. Additionally, for example, even with the same average return over time, a different order of market ups and downs may lead to different outcomes.
A possible way to manage this risk is to try to avoid taking systematic distributions from a fluctuating account. You may also want to consider dedicating a portion of your portfolio to create the monthly income needed to cover fixed expenses that are beyond what your Social Security and pension, if you have one, will provide. Once you know this number, you are ready to determine what combination of investments and insurance tools are right for you.
Question #4: Will my spouse be OK?
This is especially relevant for most couples. We all want to know that if we pass away, our spouse will be OK and will be able to carry on. It’s even more important to know the answer to this question if the spouse who passes first was the one who took care of overseeing all the family finances. Most often, one person in the relationship takes on this responsibility, which can provide organization and a sense of order in the household.
However, it’s essential to ensure that both spouses are comfortable with the family financial adviser and where to turn when life happens. Trust can take years to develop, so make this a priority while you are both healthy and able. Meet often enough to develop the trust needed for both partners to feel comfortable.
Knowing the answers to these four questions can provide the foundation for an amazing retirement.
Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 24-371
