What do you think of when you hear the word “retirement”? Do you think of travelling to far off, exotic places? Working on your golf game with all your newfound free time? Visiting your children and grandchildren as often as you (or they) want? Maybe you enjoy your career so much you will continue to work—at least in some capacity—as long as you can!
Everyone has a different view of what retirement (or semi-retirement) looks like for them. When it comes to planning for the retirement they envision, however, the answers are not always so clear. According to a recent survey of 11.5 million millennial and Gen X households by Hearts & Wallets, a market research and benchmarking firm for the financial industry, the ideal retirement age is 55. However, the report found most of these households have not yet reached $100,000 in investable assets, and only 18% of them save 15% or more of their income. Early retirement seems very unlikely for these people without some financial behavioral changes.
Whether you would like to retire early or late in life, it is important to have a plan to go along with your retirement goal. Below are five questions you can (and should) ask yourself when devising that plan, followed by an example:
1) What will I do with my time in retirement?
While it is not really a question about your personal finances, this is one of the most important questions you can answer before heading into retirement. People often enter retirement without knowing what they will do on a daily basis. Many of these same people find that, without a career to challenge them or a specific purpose for getting out of bed in the morning, their mental and physical health declines fairly rapidly. Some ideas for keeping your body and mind stimulated in retirement are reading, traveling, exercising, and volunteering.
Note: We at B&C do not intend to portray ourselves as psychologists or fitness experts. Instead, this is often the first question we ask clients who are thinking of retiring and reflects our experience serving hundreds of clients who have entered retirement in the past.
2) What income will I earn in retirement?
The need to budget is not unique to retirement, as everyone should have some understanding of how much money they earn, spend, and save. Without a budget, you are at risk of living above your means and/or not saving enough for retirement. In retirement, understanding your sources and amount of income is vitally important, as you are likely going to have a relatively fixed income (i.e., Social Security, pension, etc.) without much flexibility. Additionally, having a firm grasp of what you bring in will assist you in answering the following questions.
3) How much will (or can) I spend in retirement?
“Budgeting 101” would teach you it is not wise to spend more than you earn, which is simple enough when you are working and have a good idea of—if not exactly—what your paychecks are each pay period. In retirement, however, the amount you spend may end up being more than you bring in from various sources. Traditionally, financial planners estimate you will need around 70-80% of the salary you earned while working to sustain your lifestyle in retirement, though every situation is different. The fixed incomes available to you in retirement will often not be enough to cover that 70-80%. In that case, your options are to spend less or supplement your income by making withdrawals from your savings and investment accounts. Remember, also, you will likely spend your money on different things in retirement than while you were working. You may find that you spend more on travel and healthcare and less on daily transportation and clothing.
4) Do I want to leave a particular amount of inheritance for my heirs or give to charity?
In general, people become more charitable as they age, whether as a result of increased wealth (i.e., greater ability to give), desire to give back to those less fortunate, or both. Because each financial situation is different, each person’s desired amount of charity or familial inheritance is also different. Thus, it is important to ask yourself how much you want to give (or leave behind), taking into consideration your own needs and resources.
5) How much money do I need to retire?
Ahh, the $1 million question—or is it $2 million? If you have not already figured it out, the answers to this question and the previous three questions all run parallel to each other; you cannot answer one without answering them all. Unfortunately (or perhaps fortunately), only you know what you would like to do in retirement, so you should only focus on your own situation to determine the amount you will need to retire. Your parents, cousins, neighbors, and acquaintances all have differing visions of retirement, so why should it matter to you how much they have saved?
Ultimately, the bottom line is the earlier you can begin planning for your retirement, the more likely you will be to answer each of these questions and enter retirement with confidence. If you delay such planning, you run the risk of your actual retirement looking much different than the one you envisioned.
Contact us today to begin working on your retirement plan.
The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.