Two common questions from people approaching retirement are, “When can I retire?” and “Can I actually afford to retire?”
It’s no wonder. Determining how much money you’ll need for retirement and then ensuring that money lasts can seem overwhelming. How can you predict exactly how your life will be in 10 years, much less 20, or even 40?
No one has a crystal ball, but taking certain steps now can give you a much clearer vision of your retirement finances. It’s essential to start planning far in advance, because you may discover too late that you’re not saving enough and end up having to scrimp in retirement or relying on Social Security or other social assistance programs. Even if you feel financially secure, the planning process helps you envision your life and goals after your working years—and that empowers you to work towards the future you want.
Here are three key steps your financial planner can help you with in preparing for a more financially secure retirement:
Know “your number”
Understanding your spending patterns today and forecasting them for the future(with inflation in mind) helps you more accurately determine how much income you’ll need annually in retirement. Starting this process now—rather than waiting until you’re near retirement—raises the odds you’ll meet your income goal.
First, you should determine the expenses you’ll have in retirement. This includes regular monthly and annual expenses, such as a mortgage, utilities, groceries, property taxes and insurance premiums. It also includes discretionary expenses like restaurant meals, travel and recreational activities.
Consider how your spending habits might change. For example, if you retire early, you might have to pay large health insurance premiums out of pocket in the years before you qualify for Medicare. Or, you may have major one-time expenses, such as paying for a child’s wedding or college tuition. In advance of retiring early, discuss the different distribution requirements and rules based on your retirement plan type with your tax advisor.
Once you have a semi-clear picture of your retirement expenses, you can determine how much cash flow you’ll need to generate annually and how much you’ll need set aside for unexpected and one-time big expenses. Your financial planner can run projections and tell you the likelihood your assets will be able to support your income needs.
Review your portfolio
After determining how much money you’ll need for retirement, you and your planner should review your portfolio together. Everyone has unique goals for retirement, but your planner, working in conjunction with your financial advisor or portfolio manager, can help you determine the right asset mix for your situation over the various stages of retirement.
For example, you may want to gradually shift a portion of your assets away from equities and toward less-risky fixed-income investments as you approach and move through retirement. This can help to protect against an extended market downturn which could greatly reduce your portfolio’s value.
At the same time, your portfolio needs to grow throughout your retirement years by generating more income and keeping pace with inflation. Your financial planner can work with your investment advisor to find an asset mix that makes sense early in retirement and adjust that asset mix as your retirement progresses.
Fine-tune your plan — and make it last
A plan is only as good as your commitment to it. That’s why it’s important to annually review your expected retirement income needs and goals.
You may, for example, need to rein in a portion of your retirement budget to ensure you can continue to generate enough income through a retirement that could potentially last more than 30 years. Or you may decide to work a year or two longer or buy a second home in retirement, changing your budget projections altogether.
While proper planning creates a clear path, unexpected events in life can and do occur, so your plan needs to stay flexible enough to adapt to new situations.
Retirement planning isn’t a one-time endeavor, and chances are your goals and expenses will change as you approach retirement. But the sooner you start planning and investing for the future, the more likely you’ll remain financially secure.