Countdown to retirement: What should I be doing when retiring in less than 12 months?
There has been a lot of advice given about getting ready to retire: max out your 401(k), pay off your mortgage, fix up your house, etc. But how does one actually pull off this big life transition when that date is less than one year away? Where is your income going to come from now? Can you afford to knock off some items on your bucket list? How will you know if you have enough money to last for the rest of your life? And, speaking of lifetime, how long should you expect to need income?
Here are some pointers to consider when your retirement is less than a year away:
1. Get ready to turn your financial mindset upside down
All of your working life you’ve probably been focused on saving and investing for the future. You’ve been an asset accumulator, maxing out your 401(k), funding IRAs and 529s and basically putting money aside any way you can. After 30 or 40 years of being an accumulator, suddenly you are going to become a “decummulator”. You’ll need to start withdrawing funds in order to replace your income from work. While withdrawing from retirement accounts makes practical sense, it is not easy for most people. Their retirement accounts represent hard-fought savings over many years. The habit of saving for retirement has been ingrained. And, surprisingly, that may not be an easy habit to break.
2. Add up your expenses
Knowing how much you are spending every year is important. If you don’t know how much you spend, how will you ever know if it is enough? Keep in mind that we are not talking about making a budget which is a target for how much you plan to spend. We are talking about how much you actually spend each year. If you have expenses that don’t come up every year, try to estimate those expenses over the past five years and then average the number. Don’t forget to add a line for cash withdrawals or Venmo payments.
When you’re all done, add one more line for “Miscellaneous Expenses”. This is your fudge factor for expenses you have forgotten or cannot identify. If accurate, these expenses should equal or be slightly less than your current income from work. Once you have your total expenses, then you’ll have a baseline for the income you’ll need in retirement. Feel free to add new expenses that you don’t currently have such as Medicare and Medicare Supplement insurance premiums.
3. Make a written income plan
When your paycheck stops, you’ll need a replacement. Figuring out where the money is going to come from and when will be important. While applying for Social Security benefits to start on the day you retire may seem logical, that is not always the best choice for every retiree. The same goes for starting to make withdrawals out of your IRA in the same year that you have earnings from work. This can lead to unintended consequences or additional taxes. That’s why careful consideration should be given to each approach. Once you’ve decided where the money is going to come from, you should set up an automatic monthly deposit into your primary bank checking account. Start with an amount that you have calculated from your monthly spending needs above and see how it goes for a year. Adjust the monthly amount as needed until you begin to have a steady balance in your checking account.
4. Plan to live longer
We hear stories all the time from folks who believe they are going to die young or live to 100 based on how long their parents’ or family members’ experiences. While heredity may play a role, by far the most significant factor influencing longevity is your financial wealth. The more you make and the more you have saved and invested, the longer you should expect to live. If you think about it, it makes sense. If you don’t have much money, going to the doctor or getting treatment may get put off or ruled out. If you are upper-middle income or above, you should expect to live beyond the life expectancy tables. According to the IRS table 1 (Single Life Expectancy)1, if you are age 65 today, you are expected to live 22.9 more years or, to age 87.9—and that’s the average. In other words, many people will live long past age 87.9 years. Now you can see why making sure your money lasts matters, especially for higher income people.
5. Take your time with retirement
Retirement is a whole new chapter in life. If you are healthy at age 65, that’s likely to be another 20-30 years of living and very possibly many more. While most new retirees I work with are planning special trips or activities that they have put off during their working years, you don’t have to get it all done in one or two years. Like saving for retirement, it’s a marathon, not a sprint. It is a good time to reassess your life goals and what you want to be doing in this next chapter.
6. Try something new
Retirement is also a good time to try something new. ‘Never had a enough time for a hobby? --Start planning to spend more time on it. Want to stay fit? --Join a health club for seniors.2 Or, try pickleball, the fastest growing sport for seniors.3 In any case, remember that you’ll no longer have the routines or schedule of work. For some people, the lack of structure can be stressful because the familiar patterns of a work schedule have disappeared. I have often heard retirees say that after two years of being in vacation-mode, they need a more regular routine that requires them to be at certain places at certain times. For us working folk, it sounds like a nice problem to have, but it can be a real problem after a decades of going to work every day.
7. What is your end game?
For anyone who is about to retire, end of life planning should be part of their plan. We love this subject because so few people have thought about it, at least those under the age of 65. End of life planning involves thinking about how you envision your last 5 years on earth. It is easy to forget that in old age many of us will likely not be as able to get around and perform simple tasks the way we do today. As such, the way we live will have to change.
Over the past five years or so our family has had several family members experience failing health. Some were prepared for that, others were not. While you may have visions of passing away peacefully in your sleep, that is not the reality for the vast majority when they die. Without planning, many die alone, in pain and without a say in how they are cared for. Putting together an end of life plan now, while you are clear-headed and able, can be tremendously comforting. It can also allow you to continue to control your life when you may not be able to.
In 2023, we will be introducing an End of Life Planning program to share with clients. For more information, please contact me at Lyman@PlanWithFPS.com
8. Update your financial plan
As a financial planner, I am biased. A comprehensive financial plan will help you layout all of the groundwork needed to determine if you have enough to retire. When you stop working you’re still going to need income to pay your bills and do some fun things. If you have not figured out if your money will last, you’ve got to do it now. In surveys of retirees, one of the top regrets is that they did not anticipate how long they would live and consequently, how much money they would need in retirement. Don’t become one of those people. The financial plan you’ve had during your working years is about to change dramatically. Now you need a plan that will support you in what will likely be one of the happiest and most satisfying times of your life. Be ready by updating—or, if you don’t have a plan, create—your financial plan before you retire.
If you have questions about how to get ready for retirement, give me a call. I’m here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
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· Big changes to retirement plans in 2023 https://planwithfps.com/blog/big-changes-to-retirement-plans-in-2023
· High expectations for retirement https://planwithfps.com/blog/high-expectations-for-retirement
· What, exactly, is retirement today? https://planwithfps.com/blog/what-exactly-is-retirement-today
1 Source: https://www.irs.gov/publications/p590b
2 In our Town of Natick there is a small fitness center at the senior center; other towns in eastern Massachusetts have similar resources, too.
3 See the Boston Globe articles on pickleball including https://www.bostonglobe.com/2022/08/18/lifestyle/old-dogs-knees-new-tricks-we-took-swing-pickleball/
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.