Are You Prepared for a Successful Retirement?
What are the most common characteristics for people who retire successfully? Here is my list of seven principles for a pre-retirement client. Success is difficult to quantify, but for those who answered yes to the question, “Where you prepared for retirement?” these are things that typically appear:
1. Clearly Defined Purpose – Successful retirees decide what they are going to be doing after leaving a career. This factor is not about the money, but it is directly proportional to how good people feel about moving to the next phase of life. Whether they did volunteer work, major hobbies or start another career, they had a specific purpose and usually knew it well in advance of the retirement date. This is also highly correlated to a healthy retirement. Do you know what you will do after you leave?
2. Knowing Your Expenses - Retirement living expenses are unique to each person. I have seen the analysis that assumes 70% of pre-retirement income for a retiree. It’s too general, especially when you are close to retiring. I prefer to establish a level that matches your living standards. Then you should adjust your cash flow to match that level. I call this the “test run”. You live on the amount you believe you need in retirement for at least one year. Thinking you can make it on $30,000 per year in retirement is a theory until you have tried it. If you can do it for a year or more and it works, you are there.
3. Zero consumer debt – They eliminated credit card or other consumer debt prior to the retirement date. Often, they had been paying off credit card balances monthly for ten or more years.
4. Saving the maximum level – They had maxed out 401K or similar plans for years in advance of retiring. There are two benefits for savers. Obviously they have more when they do retire. But it also lowers the amount they spend for living prior to retirement making the transition much easier. Are you saving at the right level?
5. Realistic Expectations – They recognize the realties of life. Factors like inflation and medical costs are significant to retirees. Making the wrong assumptions can endanger your retirement plan. I hope inflation remains at the FED target rate of 1.5% to 2%. But what if it goes to 3.5% or 4%. Can you withstand that for the next 20 or 30 years in retirement? You may be healthy at retirement, but perpetual health is not a reality. While many expenses go away once you are not working, new ones seep back into your budget as health costs rise in the future.
6. Flexibility - There is recognition of unpredictable events and the flexibility to deal with those events. I do this with retirement modeling software and run stress tests that look at how well your plan holds up. But when you have the ability to adjust expenditures and withdrawals, the probability of success is high. So ask yourself, can I reduce my expenses if I had to (think 2008!) to make my money last? Otherwise, are you willing to work part time? Though be careful with that as an essential backup idea. What happens if health problems limit working? This issue is really about making sure you do not count on everything going right in retirement – because it won’t.
7. Sensible Investment Management - You must avoid being too aggressive or too conservative in the years leading to retirement. While the market was terrible in 2008, many retirees were helped by professional advisors. That is not to say none of their portfolios lost value. I am sure some did. But most advisor-managed retirement portfolios faired better than individual 401Ks. This is not just an ad for me. Those that lack the time, tools or interest in this area should get help. If you had reduced loses by 5% in 2008 on retirement accounts of $200,000 (401K, IRA, etc.) you could have saved $10,000. A Financial Planner charges a fraction of that amount for acomprehensive retirement plan. Do you have a clearly defined plan or are you just hoping for a successful retirement?
See if you can say yes to most of the items above. If you are not sure or want to discuss retirement planning with a professional, call us at 972-644-9533.