What Should I Do Before I Retire?

It’s a simple question with a not so simple answer. Today, as most workers approach the Retirement Red Zone (the 5 years leading up to retirement and the 5 years after), they are faced with challenges. No longer can they count on the company pension to provide a steady income for life after they stop working. So, it’s no wonder that many Americans are not sure how retirement will go, according to new data from the Employee Benefit Research Institute.

In fact, almost half (49 percent) say they are only “somewhat confident” that they will have enough money for a comfortable retirement. Fewer than one in five (18 percent) say they are “very confident.”
So, what should you do now to make sure you will be very confident in your ability to pay for your retirement years? Well, the answer is one of my favorites: It depends.

It depends on your specific goals in retirement and on what exactly you have done up to this point. There are plenty of factors to consider and it can get confusing.

That’s why I believe strongly every family would be well served by at least one meeting with a financial planner who is their clients’ advocate – a fiduciary advisor – and who gets paid only by their clients – a fee-only advisor. Even if it’s only a free get-to-know-each-other meeting, I expect most couples will learn a lot about where they stand and have a much better idea of what to do next.
But, even before you have that meeting, there are a few things you can do to help yourself:

Make a budget (Yes, really)

Most families spend what they want and hope they earn enough to cover the bills. And thanks to lots of convenient borrowing tools, many of us can run a bit in the red most months and keep moving forward just fine. There are a couple problems with this:

1. One thing that masks this situation is the annual bonus or compensation increase. It’s a way to catch up each year and get back to zero. When you stop working, the raises and bonuses stop too. Even in retirement, you want to have more money coming in than you have money going out.
2. There are always unexpected bills like car repairs, insurance deductibles, or medical expenses. That’s why I tell my clients to keep a cash emergency fund on hand to cover three to six months of monthly bills. This will protect you from the typical expenses that happen to all of us. And yes, they really will happen. A recent study by Bankrate.com found that three in five Americans had a major unexpected expense last year and more than half the respondents did not have savings to cover the expense.

That’s why you need a real monthly budget, on paper or on your computer. It will help you understand where your money is going. You can then consider if you are really spending money on things you truly value. After a few months of tracking your spending, you will begin to get a good handle on what it will take to live each month in retirement.

Figure out your retirement income

Since most of us do not have a pension, our retirement income will likely come from more than one place, and we need a handle on how it will all add up. Most of us will look at income from:

1. Social Security retirement benefits. That’s great, since it’s a lifetime annuity that increase with the cost of living. People born between 1943 and 1954 can take benefits early (age 62) with a penalty of up to 25 percent, or they can wait to Full Retirement Age (66) and get 100 percent of their benefit. If you want the maximum benefit, wait to age 70 and get 130 percent of your benefit. You should do some analysis to see what maximizes the lifetime benefits for your family. Hint: for those in this age group, waiting until age 70 always means more than a 73 percent increase in monthly benefits over age 62.
2. Savings in retirement accounts. Accounts like your 401(k), 403(b), IRA and Roth IRA are all likely to provide some retirement income. It’s smart to review these and calculate how much spendable income you can reasonably create each month in retirement. Remember, most retirement account are pre-tax money. That means you got a tax deduction for every deposit into the account, and you recognize income every time you take money out of the account. For most folks, that means you have to take out $14,286 of your IRA, pay the tax and ultimately get to spend $10,000.
3. Part-time work in retirement. This an excellent strategy. Even a modest amount of income after you retire can go a long way toward reaching your retirement lifestyle goals. Think about what you would like to do. What sorts of jobs are available and how long you expect your health to last?
4. Real estate. Maybe you have a lake place you want to sell to the kids. Or maybe your primary residence is too big for retirement and you can trade it for a smaller place and some cash. All of this helps with retirement income.

Eliminate debt

It’s always a good idea to pay-off high interest credit cards and loans, but it’s essential to a healthy retirement. Since your income sources will be reduced, you want to stay cash-flow positive in retirement.

Save as much as you can

It might sound obvious, but it’s not simple. We live in a culture that celebrates consumption. We all want to have the next cool thing.
But savings can be a big deal. Consider this example: Sue and Steve are 55 and want to stop working for money in 15 years. Here is how they can add $1,000 of spendable money to their retirement in the next 15 years.

• Open a Roth IRA for each. Fully fund each year for 15 years. That’s $6,500 per year each under current law. That amounts to saving $1,084 per month.
• Earn 7 percent a year over the next 15 years. The S&P 500 has averaged about 10 percent. So we think the next 15 years will be about 70 percent as good as the prior 100 years.
• Thanks to the miracle of monthly compounding, I calculate this will grow to $343,375.
• If you spend 4 percent of this total, the fund should last indefinitely.
• That means you can withdraw $1,144 each month tax free forever.

It’s not easy to put away an extra $1,000 every month, but it’s possible. If you make it a priority.

Invest wisely

Most people don’t save enough. Most of the savings is not invested for long-term growth. And most of the investments are not diversified and rebalanced to reduce risk. This creates a risk of running out of money. Inflation historically averages about 3.22 percent. Which means prices double every 20 years.

Remember that the average 55-year-old male today can expect to live 27 more years and a female is expected to live longer. If you live into your 80s, then some of your savings should be growing to keep ahead of inflation. With the 10-year treasury bond paying less than 3 percent today, the only way to beat long-term inflation is to own shares of good companies.

If you own those shares in low-cost exchange-traded funds, you can participate in the growth of the market very efficiently. With the help of a qualified financial planner, you can build a healthy portfolio of stocks and bonds and rebalance it regularly to keep ahead of inflation.

These steps are pretty simple, but they’re not that easy. Many families find that it’s much easier to do these things with the help of an expert. Don’t hesitate to seek some outside advice.

If you would like to talk about these steps and how to get started for yourself, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.