Are you ready for retirement? 5 things you should think about first
Time has flown. The possibility of retirement, which seemed as far away as the setting sun on your way home from work perhaps 30 years ago, now seems much closer to your windshield.
But you may not know when you’ll be ready to make a career out of it. Some people make the mistake of thinking they are ready for retirement when they are not. They take the plunge, only to find that retirement isn’t as carefree as they imagined, mostly because their retirement plan, or some random version of it, had critical gaps and didn’t sufficiently cover their needs and their wants.
If you are about to put your professional life behind you, be sure to thoroughly analyze all the financial implications of this important step. Here are five important factors to consider when determining whether or not you are ready for retirement:
It all depends on your lifestyle
Know what you want in retirement, where you want to go, what you want to do, and most importantly, how you want to feel when you do it: confident, secure, free, and in control.
Here’s an example: Think about the start of your retirement and say you’re taking a dream trip to Italy. You’re there two weeks, but you’re still thinking about money when you’re there – either what your money does for you in investment accounts or how much you spend. So you are worried, and you are not fully enjoying this dream trip.
Maybe you’re good at putting all those thoughts and feelings aside when you’re traveling, but then come back to concerns about how much you’ve spent or how your investments are performing. This is proof that you haven’t planned well.
The same concept applies in retirement when you’re going out to dinner, buying a nice gift, or planning your next car purchase: if you’re worried about spending and wondering if you can afford to do the things you always have wanted to do, then you are not experiencing retirement as planned.
Having predictable income and cash flow is essential
These are the main drivers of an enjoyable retirement lifestyle. Many of the previous generation retired with a pension and Social Security, and these sources of income covered most, if not all, of their lifestyle needs. But today, savings are the engine of the retirement lifestyle. Today, few people receive pensions, the cost of living is higher, social security barely covers needs, let alone wants, and many retirees today want to go further and do more things , which is more expensive.
What you need to do is create predictable cash flow to cover the majority of your lifestyle needs or your essential lifestyle. Without predictable cash flow, you will prepare for a variable retirement lifestyle that is really based on the variability of volatile markets.
Even if you are diversified in the stock market, the bond market, the commodity market or the international market, without predictable cash flows, your lifestyle will fluctuate with their fluctuations. When times are good you will have more to spend, but when times are bad you will feel the pressure to spend less. This may mean putting a trip on hold or even canceling a dream vacation.
Most retirees do not want to experience retirement with variability in their lifestyle. There are different types of investment and insurance products that trained finance professionals can explain to you that can provide protection against down markets, upside opportunities and predictable cash flow options.
You can’t afford to forget about taxes
Many free online retirement calculators that people use to analyze their retirement readiness can be misleading. For example, these calculators will ask for an account balance, leading people to think that the balance indicates the exact amount of money they need to use, which is often not the case. Net of tax – the amount left after tax is deducted – is your actual actual balance. The calculators use the gross amount or pre-tax balance to run simulations for your future retirement. But that’s the after-tax amount you have available for your lifestyle.
Half a million dollars showing up as an account balance in a 401(k) may actually only be about $350,000 after taxes. In contrast, a balance of $500,000 shown in a Roth account is exactly what you can spend because it’s not subject to tax on withdrawal, as long as it’s been at least five years since you contributed. for the first time on the account and you are 59½ or older.
Ultimately, when you plan for your retirement, where you put your money and how you invest it based on the type of tax treatment of the account can have a big impact on your retirement.
Investing is about more than risk tolerance
It’s a common question from brokers: “What is your risk tolerance?” In the real world, when things are going well, people tend to say they can handle more; when times are not good, many people tend to be much more risk averse. Most fall somewhere in the middle, ending up with a moderate portfolio that doesn’t help much in good times and can be more detrimental in bad times.
Think about what you really own and why you own it. Do you really understand what you own and why you own it, or when you will use what part of your money? If some of your money is for a short-term horizon, you need to think about it differently than money you don’t need for 10 years. This approach circumvents that generic risk tolerance, where people take all their accounts, put them together, and treat all that money exactly the same, which doesn’t lead to good investment expectations.
Integrative planning weaves all financial elements together
A smart retirement plan helps you get what you want, addresses your concerns, and reveals opportunities by integrating income, investment, taxes, protection, and inheritance. An integrated plan should optimize your short-term resources and maximize your long-term savings. It offers a personalized framework and flexibility to put your money to good use in the dynamic situation of retirement. An integrated plan is useful and provides peace of mind rather than just having a wallet or buying a financial product that can be made to just sound good at the time.
There will always be uncertainty in retirement. But keeping these key points in mind will inform your decisions on how best to navigate and enjoy it.
Dan Dunkin contributed to this article.
Co-Founder, Wealth With No Regrets
Barry H. Spencer is a Registered Investment Advisor and co-creator of Wealth With No Regrets® (www.wealthwithnorregrets.com).He has appeared on national and regional programs as a financial educator, author, speaker, and specialist in estate strategies and charitable giving.
The appearances in Kiplinger were obtained through a public relations program. The columnist received help from a public relations firm to prepare this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.