By Brian Bloxom, ChFEBCSM
Everyone has their own idea of what a happy retirement looks like. For some, fulfillment means transitioning to part-time work. For others, it’s about having quality time with family, pursuing hobbies like gardening or golfing. However you envision it, the five years before retirement are vital for planning. During this phase, you must determine if you have the financial means to retire within that time frame.
If you’ve taken the necessary steps to prepare your finances, you can stick to your current plan and stay on track for retirement. But if you haven’t planned enough, you may need to extend your timeline or make changes to your retirement strategy. As you approach the final stretch, our team has outlined four steps to help you prepare for the upcoming golden years to feel confident you’re ready for a fulfilling retirement.
1. Think About Your Retirement Date
The beauty of retirement is that it’s finally all about you, including your values, priorities, and goals. And the good news is there’s no “right” time to retire. The best time to make the transition is the time you determine is ideal for you.
If you’re thinking about retiring early, be sure to look at any potential consequences that may come with this choice. Ask yourself if you may be sacrificing your prime earning years and examine the impact this could have on your retirement savings. The sooner you retire, the longer your investments must last.
It’s also wise to think about Social Security and when you will draw on its benefits. If you start collecting as soon as possible at the age of 62, your benefits could be up to 30% less than they would be if you waited until age 67. Also be aware that you will not be eligible for Medicare until you turn 65. If you choose to retire before that age, you may need to purchase separate health insurance out of your own pocket, which will have an impact on your retirement savings.
On the flip side, there are many advantages that come from delaying retirement. Consider the fact that the longer you work, the more you can contribute to your retirement savings. This will postpone the need to tap into your nest egg, which ultimately lowers the chances of outliving your money. Also, waiting until full retirement to collect Social Security benefits may increase your future benefits. And if you decide to continue working for a company for additional years, you may have access to company-sponsored benefits such as healthcare, which will absolve you from needing to pay for this expense out of your own pocket.
2. Balancing Retirement Expenses
Failing to do a proper retirement-needs analysis is one reason many people find themselves struggling financially during their post-work life. To start mapping it out, first take some time to write down your actual expenses as they stand right now. Next, think about your future priorities and determine if your expenses will fluctuate up or down by the time you retire. As you obtain a realistic picture of how much money you’ll need for retirement, your analysis should take a holistic approach. This means considering all aspects of your finances, including items that could affect your cash flow and expenditures.
A few things to think about as you analyze your situation:
- Realize that some expenses will disappear, such as your mortgage and work-related costs.
- Other expenses may rise, like healthcare.
- Most Americans are automatically entitled to Medicare, but this likely won’t cover all your healthcare expenses.
- Medicare does NOT pay for long-term care.
- Remember to factor in the rising costs of inflation over time.
3. The Three-Legged Stool
The three-legged stool is a metaphor of stability. And because stability is something we all want to experience in retirement, it’s important to consider the three primary sources of income that most Americans rely on during retirement that support your future lifestyle:
- Social Security benefits
- Employer pension benefits
- Individual savings and investments
Legs 1 and 2 represent Social Security benefits and employer pensions and produce a steady stream of your retirement income. However, fewer employers are offering pension plans; because of this, many retirees rely on the third leg to play a major role in retirement funding. Leg 3 includes options like Traditional and Roth IRAs, 401(k)s, and any other investment or savings accounts.
It’s important to have an investment strategy that balances growth with your risk tolerance, considers the impact of current and future tax years, and aligns with your retirement goals. Discussing these things with your advisor is key to a successful retirement as they can tailor a strategy that matches your unique situation.
4. Making Your Retirement Dollars Count
You have worked long and hard to build your portfolio of retirement investments, and the most prudent approach involves making every dollar count in your favor. It’s important to convert those dollars into income while balancing things like risk tolerance, liquidity, anticipated rates of return, and any potential tax consequences.
Have you thought about how your assets are allocated? This is the process of determining how much money to put into different types of investments. During your earning years, the proper strategy is almost always to focus on long-term growth. But at retirement, your asset allocation may shift toward producing steady income, lowering intermediate volatility, and keeping consistent annual returns.
It’s also important to consider your withdrawal rate once you hit retirement. This is the portion of your portfolio that you liquidate annually for your living expenses. Your withdrawal rate will require you to determine how much you need to withdraw each month/year without draining all of your retirement assets.
Finally, think about the order of withdrawal as you analyze your accounts. It’s imperative to consider the order in which you will access your retirement funds if you have multiple accounts, because the tax consequences for each will differ. These decisions could be also impacted by required minimum distributions (RMDs) that are associated with accounts like Traditional IRAs and 401(k)s.
Work With a Trusted Advisor
It’s always a good idea to review your retirement plan regularly, but the last five years before your planned retirement date are especially important. During this time, things can change, like your job, family, or goals. It’s a crucial period to assess if you’re on track and if retirement is still possible.
At Sentinel Wealth Partners, we are dedicated to helping our clients prepare effectively and stay on course to meet their retirement goals. Instead of going through it alone, we want you to experience the confidence and clarity a financial professional can provide. To schedule an introductory meeting, reach out to us today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Disclosure
“Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.”