You have worked hard to be a diligent saver, and your many small, wise decisions over the years have led to building up a nice nest egg. However, no matter how confident you feel that you have saved enough, or how much, emotionally, you are ready to step away from working, there is often the question we ask ourselves: am I going to be okay?
What does it mean to be “Retirement Ready”?
Retirement marks the transition from an active work life, and replacing that with more time for yourself, your friends and loved ones, and doing the activities you enjoy. Or another way of putting it, is finally enjoying the fruits of your labor! Some of the most common items on our clients’ retirement agendas is:
- Being more active with their family
- Spending time in their community
- Focusing on learning new skills or honing existing ones or working on passion projects
- And of course, we have our adventurers: from world travelers, to simply experiencing new things locally or exploring other states.
Many of our clients have spent most of their lives grinding in the corporate world, and now it is finally time to just R-E-L-A-X. Your retirement readiness is being prepared financially, maintaining your standard of living, and ensuring it will continue throughout retirement.
What are 5 areas I should consider before I retire?
1. Determine Your Retirement Age and Income:
Two important factors when planning for retirement are the following: when will I step away from my current income? and what annual income do I want/need each year? When planning for retirement, it is very common to adjust both the age and income as your situation or needs change. For example, we have many clients that are on track for their “traditional” retirement goal, but we will run an analysis on an “Aspirational” goal to reach an earlier retirement age and/or increase in retirement income.
What should you consider when deciding your retirement age/income? First, see what you have currently accumulated in retirement savings and what your future saving capabilities will be. Next is identifying your available income streams in retirement – social security, pensions, annuities, rental income, etc. The difference between what you receive from these sources of income and your desired retirement income will determine how much you will need to withdraw each month/year from your retirement savings. How do you determine what retirement income you will need/want? Obviously, there is no hard and fast answer to this – but consider the following when coming up with this amount:
Essential Expenses: What are my monthly expenses to cover my basic needs? Food, shelter, utilities, medical, transportation, etc.
Discretionary Spending: What do I like to do and how much do I spend doing it? Entertainment, dining out, hobbies, travel, gifts for family and grandchildren, etc.
Wish List Items: What larger, one-time expenses would I like to plan for: Vehicles, vacations, funding grandkids’ college fund, other desired luxury items, philanthropic contributions, etc.
Clearly understanding your desired retirement age and income will guide your decisions forward. And having a financial solid plan built upon this understanding can help provide you with peace of mind, while staying the course towards your goals.
2. Establish Retirement Goals:
Your retirement goals are the dreams you have today, about what your life will look like in your retirement years. Do you plan to spend your time with your kids and grandkids? Do you want to travel and see new places? Do you plan to buy a second home to “snowbird”, or an RV to explore the country? Daydreaming can be constructive! It is important to think about these things and determine what holds the most value to you. Maybe you have done such a fantastic job saving that you simply will not spend all the money in your lifetime, and it is important to you that you leave a legacy for your children and their children, or a charitable contribution that will leave a lasting impact in your community. These goals will feed into the income needs mentioned above, as we quantify the financial aspect of these goals and build them into the overall plan.
I want to share an example of a not very sexy, but tangible plan goal – paying off the mortgage before retirement. Yes, there is an argument to be made about what your dollars can do for you in your investment accounts rather than paying down your low interest mortgage, however, sometimes we need to weigh the value of an emotional decision vs a financial one. Knowing that you are stepping away from your income is a pretty scary endeavor for most people, but that decision can be made much easier when you have eliminated your largest expense. As we head into the 2nd Quarter of 2021, with interest rates are still incredibly low, it may be a wise time to refinance, and reduce the interest rate and term of your mortgage. Running a mortgage analysis is worth the few minutes of time to decide the efficacy of doing so. Let’s say you are 55 years old, planning to retire at 67, you are 7 years into your 30-year mortgage at a 4% rate, and you still owe about $200,000. You are unable to pay the lump sum needed, as most people cannot, but you have some room available in your monthly cash flow. Even without refinancing, if you can pay an extra $560 toward principal each month, you could pay off the house 12 years earlier, saving $50,000+ in interest, and allowing yourself to enter into retirement without a mortgage payment.
3. Maximize Your Retirement Savings:
It is important to know all of the available options you have at your disposal to maximize your retirement savings. Qualified Retirement Plans are the easiest way to put money away for your retirement. Does your employer offer a retirement plan? Do they match and how much are you contributing? There are many factors to consider, but the most common and efficient way most people save are through pre-tax contributions through an employer sponsored plan (IE: 401K, 403B, most 457, and TSPs), allowing you to save more of your hard-earned pre-tax dollars, with less of a net impact on your take home pay. This year, in 2021, Eligible individuals can put $19,500 per year from their pay into these accounts, and an additional $6,500 if they are over 50+; that’s $26,000 a year that is pre-tax savings! Now, what about IRAs and Roth contributions? Are you under the phaseout limits to contribute to these accounts? Eligibility on IRAs and Roth’s are based on tax filing status, income limits, and coverage of employer sponsored plans – but if eligible, can play a vital role in maximizing your retirement savings.
Let’s look at a tangible example of how you could take advantage of one of these plans; Let’s say you earn an annual salary of $120,000, you have 12 years until retirement, and currently contribute 5% to your 401K. If you increase your annual contributions from 5% to 12%, that is an additional $8,400/ year. With an average rate of return of 6%, that increase in contributions will provide an additional $150,000 in retirement savings. Let’s assume you are in the 22% Federal Tax Bracket and 3% State, that saves $3,600 each year in tax savings. The ‘pain factor’, or what the actual impact you’ll feel in your income each month is approximately $525.
4. Prepare for Life’s Uncertainties:
We feel that every solid financial plan requires building in a safety net (or even multiple safety nets) to help protect from the unforeseen. What do we mean by this? In many cases, it is not if, but when a life event or an incident will come along that will derail even the most thoughtful financial plan. You will never be able to plan for every scenario, but you can build measures in place that can provide protection around your overall plan. One of the easiest ways this can be accomplished is by “over saving” for your retirement. We have a saying at Stewardship Wealth Advisors, “When in doubt, work it out”; this is often easier said than done, but is typically easier for people who enjoy what they do, without physically demanding jobs. This may vary from person to person, maybe you are burnt out from corporate life, or a high stress, demanding job – in which case there may be a hybrid approach available to you. You can step away from your high stress job and take an easier position that provides enough income to meet your needs, but delays the amount of time before you start to take from your retirement accounts.
5. Maintain Your Plan and Review Often
While considering each of the points listed above when building a robust and thoughtful retirement plan, it is equally important to stay the course and carefully monitor progress as you navigate towards your goals. As advisors, we meticulously keep track of your Financial Summary; tracking your net worth, income, tax bracket, retirement goals, and any other pertinent items that are unique to you, and periodically monitor to ensure that you not only are retirement ready, but stay retirement ready. Implementation of the plan means keeping healthy tension and making minor adjustments along the way. Your goals may change, your desired retirement plans or income might change, life can change. But having a plan ready for those changes, having the ability to shift your plan as you need, and being prepared for the unexpected, is being retirement ready.
Preparation in Retirement is Key!
It is never too early to think about your retirement. In fact, if you are reading this blog your head is in the right place. We handle all these items on a regular basis with each of our clients, and even after we’ve designed and implemented a plan that has kept steady for many years, we find there are frequent changes needed to be made to keep a plan on course. It is not a “set it and forget it”, but an ongoing project that requires careful thought and gentle nudges to push a plan in the right direction. I will leave you with one of my favorite Abe Lincoln quotes, “If I had 1 hour to cut down a tree, I would spend the first 45 minutes sharpening my axe.” Time spent preparing will always be time well spent, and we are passionate about ensuring your axe is sharpened.
About Stewardship Wealth Advisors
Stewardship Wealth Advisors is an independent, fee-based comprehensive financial planning firm dedicated to empowering clients to steward their wealth well and maximize their hard work and dedication. With decades of experience, our team of advisors builds a foundational relationship to create a personalized financial plan to help their clients reach their goals and achieve financial independence. To learn more about what we do and how we can help you, connect with us online.
Information provided is hypothetical only, provided for informational purposes only and is not intended to be a projection of current of future performance or indication or future results. The information provided is not based on actual current or past clients. All situations are unique, and results will differ depending on individual situation.
Advisory services are offered through Stewardship Wealth Advisors, a Registered Investment Advisor in the State of Arizona.