Soon-To-Be Retirees Need a Plan


You may be dreaming of those days when you trade time spent in the office to days on a beach, playing golf or traveling. But funding any retirement lifestyle requires having enough income and savings to cover your needs. Knowing whether you’re able to take this next step means assessing where you are today, where you want to be at retirement and what you need to do to get there.

“Everyone, regardless of who you are and where you are in life, needs a plan and you need proper expectations around that plan,” says Katherine Dean, managing director of wealth planning, Wells Fargo Private Bank. “You have to understand what you want and what you’re working towards.”

Retirement planning is a lifelong process, and with life expectancies nearing 80 years, you need to start as early as you can so you can adjust your strategy as needed. “The problem with arriving at the doorstep of retirement without the assets or plan to support yourself is that you don’t have time to make up that error in planning,” says Rebekah Barsch, vice president at Northwestern Mutual.

While you’re accumulating assets though, it’s important to conduct a litmus test at least once a year to figure out if you’ve enough assets and income to last through a retirement that can potentially last 30 years. Experts explain what to look for as you go through your finances.

Define Retirement

Retirement can mean different things to different people. Your desired lifestyle and where you’d like to live will drive how much income and assets you’ll need.  “It isn’t just the money, but what you want to do with all this time because that’s where the happiness comes in,” says Craig Brimhall, vice president of Wealth Strategies at Ameriprise Financial. “You have to feel fulfilled in your retirement.”

Think about when you’d like to retire too and when you’d like to stop working. Finances aren’t the only factor though, as you may have to retire earlier than expected because you or your spouse may have health problems or you’re unemployed, says Brimhall. “It’s important to have a goal as to when you can be financially independent. You can pick a date but you should try to be ready sooner because you may not be able to choose when to retire — it may be forced upon you.”

Look at Your Financial Plan

“Once you have an idea of what your retirement will look like and what it will likely cost you, you should be able to back into the number you’ll need using a withdrawal rate or retirement calculator,” says chartered financial analyst Robert Stammers, director of Investor Education for the CFA Institute. “Your portfolio must also be able to generate income over retirement that will support your withdrawal rate or liquidation plan.”

Review Your Current Budget. Since this will be the basis for your retirement budget, experts suggest reviewing your current living expenses to evaluate whether you’re saving as much as you can.

“It’s important to know your expenses now and what might change by making lifestyle changes,” says Lyle Benson, certified public accountant in Towson, MD.  “Understand what makes up that detail because the only way you can determine whether you can afford to retire is to know how much you need on a monthly basis,” he adds.

As you put together your retirement budget, create one category for essential or fixed expenses that include food, lodging, health insurance and taxes, and another for discretionary expenses. The second bucket will fund those things you’ve been looking forward to doing your whole life. Depending on your lifestyle, some costs may decrease while medical and travel expenses might go up.

Moving to a smaller residence may be part of your plan too as you may prefer a different location or a condo requiring less maintenance. Your home is a big asset, says Benson. “Although you may not net a lot from selling your home, this could be a great way to reduce your monthly costs and lower your expenses.”

Assess Your Income, Assets and Investments. Just like you inventory your expenses as you put together your budget, experts suggest doing the same with your income and investments.

Look at your sources of income like Social Security, any pensions or rental home income to see if these are sufficient to cover your essentials. When there’s a stop gap, the alternative is that you may have to continue working to supplement your retirement, cut expenses, delay retirement altogether or make withdrawals from your portfolio.

Earning income through part-time or full-time work, if you can, will alleviate pressure on your portfolio, as you may be able to delay taking Social Security. For each year you delay, your payment increases by 8% — consider this an 8% return on your investment. “Unless you are incredibly unhealthy heading into retirement, your best strategy is to wait to take social security until you’re 70,” says Barsch. “You want to use your assets, part-time work, rental income to cover your expenses and then take your social security when you’re 70 to maximize that payment.”

The income from working could provide other benefits too. Consider that you’ll need to withdraw about 4% from your portfolio a year during retirement. “If we believe that number is close to true, if you earn $20,00 a year, that’s the same as having $500,000 in a portfolio at 4%,” says Brimhall. While you’re earning that $20,000, you wouldn’t need that $500,000 in the bank.

A rental home can also provide income to cover your expenses during one phase of retirement, similar to part-time work. In your next phase though, you may not want to take care of that house and decide to liquidate the asset and use that income to help fuel retirement income, suggests Barsch.

Next Steps

“If you get to that litmus test and you’re not there, there are several things you can look at,” says Dean. You have options and can getting a second job so you can save more, consolidate debt, reduce expenses, or move someplace cheaper. “These are all things to think about if you’re trying to get there and make ends meet,” says Dean. “You can’t just stick your head in the sand and leave it there — no one else will make this happen except you.”