Whether you are traditional, sixty-something retiree or a young acolyte of the FIRE movement, preparing for retirement is much more involved than picking a date and letting HR know. It’s not something to be undertaken lightly. You need to be just as prepared mentally as financially. You also need to adjust to a new manner of cash flow, both in and out. Big changes await and I am not just talking about being able to slack off on email and sleep in.
Getting ready financially should have been an on-going process since you started your working life. Now that it’s time to retire, I am sure you appreciate all of the advice about saving 15% to 20% of your life’s income. It doesn’t really matter what your income level was, if you had time on your side and diversification, your investments should have grown substantially. Preferably, you have saved and invested diligently and have the three-buckets of money to pull from. You should have some money in tax-deferred accounts (like 401(k)), some in taxable accounts (taxable investment account), and some in your tax-free accounts (think Roth). Having these three accounts will provide you with financial flexibility when it comes to paying yourself. That way you can do some savvy tax planning.
Now it’s time for you to pay yourself. You’ll need to setup a payment plan to replace your former employment income. One thing you don’t want to do is take one, large, lump-sum amount from your investments for the entire year. Nor do you want to spend willy-nilly without knowing how much you need. Look at your annual expenses, eliminate any expenses you no longer need to pay that may have been employment related, and set some guardrails as to how much you will withdraw. Generally, you want to keep those guardrails around 3% to 4%. That is, you can take a higher amount, say 4%, from your investments in good, up market years, and cut back to 3% in down years. You need to assess your personal situation and cover this with your financial planner. Remember, your needs are changing.
Have a cash cushion. This is especially important now that you are not working any longer. When earning money, many advisers recommend 3-to-6 months of money as an emergency fund. Now that you are retired, that may need to be increased to 12 months. Remember, you don’t have earned income any longer.
You need to be prepared mentally as well as financially. You won’t be working towards retirement any longer. You are now working to enjoy your retirement. Plan something to help you stay engaged socially, physically, and mentally. After the first few weeks of sleeping in and resting up, you’ll be asking yourself, now what? Have an action plan; charity, volunteer, consulting, second-act, etc. Having a very part-time gig will help you stay engaged, maybe earn a little cash to help take pressure off of your investments, and keep you active. Remember, your knowledge may be in big demand. Don’t rule out the idea of consulting or teaching when you can.
Your spending pattern will change. This adjustment is both financial and mental. For many of us, being able to pick up the check is sometimes closely tied to our profession. Remember, you likely no longer have an expense account or corporate credit card - you’re on your own! Stop volunteering to pay and reaching for the check every time you are out to dinner or at a fundraiser. Keep in mind that you do need to build in charity to your spending plan so you are not a miser. You can still treat friends and family from time to time, but just make sure you have accounted for it and planned for it.
Do something physical. Re-engage with an old hobby or sport that you got away from due to your working career. If that’s not appealing, try something completely new and surprise yourself. I am not fully retired, but during the pandemic I had extra time and I took up oil painting. I have always liked art but never had time for it. Now it’s back on the agenda and surprisingly I’ve found it helps me with my work. If I have a difficult issue and stop to paint for a while, it relaxes my mind, changes my scene and my brain can work on the problem in the background. I’ve had surprising breakthroughs and it’s been very helpful.
Get that post-retirement plan in place. You don’t need to know every aspect before you retire, just be open, flexible, and remember it’s not just about the money. As an independent CERTIFIED FINANCIAL PLANNER™, I can help you plan for retirement and prioritize your goals. Contact me and let’s get started. #talktometuesday #education #Hireaplanner #retirement #stressfree #lifeplan #savings #FIRE #payyourself