Retirement is often thought of as one big decision. But planning for retirement is actually a series of small decisions made along the way.
It usually starts out as wanting to know the answer to the BIG question of can I financially afford to retire? Or do I have to continue working? Yes or no? On or off? Retire or keeping working?
As with many things in life, it can be helpful to break a BIG decision like retirement into smaller more bite sized decisions.
The first of which has nothing to do with money at all.
The first decision to make is, if money were not a factor, would you continue working as you currently are?
We’ve seen a growing trend of retirees being financially able to retire, but either choosing not to, or going back to work after a couple of months off. There are a number of non-financial reasons to consider working in retirement.
And there is great peace of mind in knowing that you have the means to retire and choosing not to do so. It can often take the pressure off and allow you to enjoy your job more.
But let’s say you want to stop working. Okay, what’s the next decision to make?
The second decision to make when planning for retirement is what will your lifestyle be? And what will it cost to support it?
Making this decision is going to involve making some assumptions about the future. These are not locked in decisions, but more anticipatory best guesses.
If you plan on keeping things similar to your current day-to-day lifestyle, your projections will be a little easier to make. If you don’t do so already, track your spending over a 6-12 month period and project that out into the future. You’ll want to make some adjustments for inflation over time as well.
If your lifestyle/expenses are going to be different in retirement than they are now, that’s going to involve some more work. Are you planning on moving? Traveling more? Becoming a member at a local golf course? And what will these new expenditures cost?
These numbers are going to be more difficult to pin down. But do the research and give it your best estimate.
It’s important to keep in mind that spending will likely not be consistent across retirement. The first couple years of retirement are typically the most expensive. This is when folks are healthiest and the excitement of having newfound time compels action, and therefore spending.
But don’t put yourself in a hole, as retirements are lasting longer and the possibility of having to pay for things like long-term care should be considered as well.
According to the Bureau of Labor Statistics, the average American between the ages of 65-74 spends approximately $52,000 per year. While the same average for folks 75 and older moves down to around $40,000 per year.
$52,000 of expenses per year works out to $4,333 per month, we’ll keep this number in mind as we move further through the decision making process.
The next decision that needs to be made when planning for retirement is where will the replacement income come from?
Is there a pension? Social Security? Investments? Bank accounts?
It’s important to keep in mind that these are averages, and while the actual dollar numbers for your situation could vary significantly, the decision making process should remain the same.
So that is a shortfall of $2,778 per month that needs to be made up from somewhere. Again, let’s go to the averages.
The average 401(k) balance for Americans over the age of 65 is about $255,000. For simplicities sake, we’re not going to assume any growth in the investments, although de-risking your retirement accounts upon retirement is a huge mistake.
With no growth, this average American would have about 13 years worth of runway.
When planning for retirement, get the dollars and cents boiled down to how many years the money will last for. This helps you think about it more concretely.
There are many other decisions to consider when planning for retirement.
If you really want to stop working, what levers can be pulled to give you more runway? How do we factor in investment growth? How should the investments be handled to balance withdrawals and long-term growth? If you have multiple investment accounts, what accounts should you pull from first?
Should you wait to tap Social Security until full retirement age? What about required minimum distributions? What about planning for things like capital gains taxes when the investments need to be sold?
And even if you make the decision to continue working, more decisions stem from that.
Can you afford to reduce your hours? Can you change jobs to something that better aligns with how you want to spend your time? Should you put more money into your investments while you continue to work? And what impact will all of that have on your future retirement?
All of these tiny decisions contribute to the overall decision of whether or not to retire. But it can be overwhelming to think about and plan for everything.
Answering the big retirement question is the number #1 reason why folks work with us!
But we’ll give you this free of charge: a sustainable retirement is more about your expenses than a dollar total in your investment account.