Retirement is a time of life that many people look forward to. After years of hard work, it’s time to relax and enjoy the fruits of your labor. However, before you can truly enjoy retirement, it is important to answer the simple question that most keeps pre-retirees up at night: Do I have enough to retire? While certainly the answer can be complex and nuanced, it still simply comes down to income and expenses. Namely if your projected income exceeds your projected expenses then you have enough to retire.
The Importance of Having a Plan
While most people would agree that having a retirement plan is important, there seems to be some confusion about what exactly constitutes a retirement plan. Let's take a moment to clarify what does not qualify as a retirement plan. A 401k, Social Security, or simply picking out the date of your retirement are not a retirement plan in themselves. Although each of these is a key component, relying solely on them will likely leave you feeling anxious and uncertain about your retirement.
A comprehensive retirement plan should include an income plan that maximizes Social Security benefits, ensures that you're not overspending or underspending in retirement, and establishes the appropriate asset allocation. It should also explore tax strategies, forecast medical expenses (including long-term care), and make provisions for high-impact contingencies such as high inflation or the unexpected death of a spouse. A well thought out and executed retirement plan gives retirees the confidence they need to truly enjoy retirement.
In his book “Don’t Worry, Retire Happy” retirement planning expert Tom Hegna identifies two simple yet critical questions to ask as you approach retirement:
What do I need my retirement income to do?
What do I want my retirement income to do?
Fortunately, the answer to the first question is pretty clear and simple to get to…We NEED our retirement income to provide for our basic living expenses. We can get to this through simple tracking and forecasting. It is for this reason I recommend that my clients track their expenses for at least one year preceding their retirement. While some experts recommend a percent of your current income (anywhere from 60% to 80% depending on the “expert” who is talking), I find these rules of thumb to be disingenuous and not a good basis when retirement planning on a personalized basis. If you can track your expenses for an entire year ahead of time, that is long enough to catch the one-off annual payments such as car insurance or property taxes, and you can go through and pick out any expenses that will go away in retirement such as professional membership dues or tools needed for your job. As a quick aside, I do recognize that many people wait to start planning their retirement, or at least wait to engage with a planner until their retirement date is much closer. If you are one of these people, the key is to get started as soon as possible. Better data leads to better projections, which leads to higher levels of confidence.
Now that we have our first question answered, the fun part can start! Once we’ve made sure the basic needs are covered, it is time to start answering the question of what I WANT my retirement income to do. In my experience many people spend time on this at a very high level but have not thought about it down to the detail. Many clients will give me responses such “I want to travel” or “I want to be generous”. While those are certainly good goals, they are too broad to actually plan towards. Being specific and intentional with what you want to accomplish in retirement not only aids in the planning process but significantly increases the likelihood of achieving those goals.
Knowing your expenses is half the equation. Figuring out the income piece comes next. Check out Part 2 to learn more about income options in retirement.
This post is for educational and entertainment purposes only. Nothing should be construed as investment, tax, or legal advice.