Retirement. It’s a big and scary decision. You typically only get one shot at it and most of your decisions are permanent. While similarities abound in how people and advisors plan for retirement, everyone’s situation is unique. That said; however, there are many things to consider, review, and get in order before you pull the proverbial plug on working. Here are my top suggestions to put you in the best position possible for a comfortable retirement.
What Does Retirement Mean To You?
The first piece of advice I always give is – figure out what retirement means for you. What type of lifestyle do you want to have or maintain? Do you want to travel more? Buy a beach home? There are no wrong answers except “I don’t know.” How can one effectively plan for a lifestyle when they have no idea what they expect? That’s why it’s crucial to think through (with your significant other, or yourself) and really determine what you want out of the next 20/30/40 years. You may find it a therapeutic and fun exercise far too many of us miss.
Use Working Capital Now For Those Big Expenses.
Unpredictable expenses will naturally arise in retirement. I say pay for as much of the predictable ones as possible now while still working; benefit from that working capital. This puts less stress on your investments and more easily allows you to plan for a consistent retirement. You’ve always wanted to redo that master bathroom or kitchen? Well, do it now (as you can always work a little longer to fund if need be). Once you turn off that income faucet, it’s typically done forever.
Minimize Fixed Expenses & Maximize Fixed Incomes
These two concepts are the essence of preparing for a healthy retirement. First, minimize those fixed expenses where able. I, for one, like paying off that mortgage or kids student loans despite them being at lower interest rates. The idea here is to structure your retirement to be flexible and nimble. By minimizing the fixed costs, it allows you to cut back easily without severely impacting retirement lifestyle.
The other end of this spectrum is to maximize those fixed predictable incomes. This may mean working with someone to figure out the best pension strategy for you, when and how to take Social Security income, or even expand your investment mix. Sometimes utilizing some form of annuity product to subsidize your fixed retirement incomes makes sense depending on your needs.
When your incomes are fixed high and your expenses fixed low, the probability for success goes up substantially. This makes the dependence on volatile investments less important, which is never a bad thing.
Understand Your Budget
People don’t budget – and it’s a huge risk in retirement.
An often missed step for high earners is not really understanding what it costs to be them. This is an issue for all of us; however, I find it most prevalent in the high earner category. Generally speaking, these individuals never had to budget before. They made enough money to save at a nice clip and always purchased whatever they wanted. Now that the income has stopped, it is important to get a firm grasp on what the expectations are that you will spend on a monthly or annual basis. Try this exercise a year or two before retirement as it will be eye opening and really provide that clarity needed to properly plan for the “golden years.”
Get The Perfect Asset Mix For Your Portfolio.
Clients don’t often realize how critical asset mix is in pursuing their retirement goals.
If you’ve taken all the previous steps, it will best position you for this conversation. I find it most helpful to work with someone to understand the needs of your investment portfolio. From there, you can determine what level of risk you are willing to use. I would caution that once set unless there are major changes to your needs and/or risk tolerance that you try not to deviate from the strategy. You are then able to let your strategy dictate the end result, rather than a knee-jerk reactionary move that is often based on emotions.
Protect and Plan For Medical Expenses
This is an always moving target and can swing drastically from person to person. Fidelity estimates that it will cost the average 65 year old couple $260,000 in 2016 in medical costs through their retirement. This does not take into account the roughly $130,000 (on average) in Long Term Care costs that 7 out of 10 retirees will experience. So what should you do? First, make sure you’ve allocated for the looming medical costs. The HSA is a great vehicle for saving for these expenses due to its very favorable tax treatment. Also, if you haven’t already inquired with your financial planner on Long Term Care insurance, I suggest you do. They can help properly educate you on the pros and cons to see what is right for you. Medical expenses are real and the trend has been these costs are growing exponentially each year, so make sure you are properly prepared.