If you are thinking about retirement, you need to start thinking about shifting your mindset from focusing on accumulating wealth to distributing wealth and drawing from your resources. But that’s only part of preparing for retirement. It’s not just about the money. There are a number of non-financial aspects to having a successful retirement.
Run Your Numbers
The first financial consideration is being aware of whether your resources will match your expenses. Project your annual living expenses and include a compounded inflation estimate. I prefer to work with annual expenses so I don’t accidentally miss an annual or semi-annual bill. Total up your annual income. Start with predictable sources such as Social Security income, pension checks and annuities. Compare your total inflow to your total outflow. If you have a shortfall, you will need to look to your savings, including your IRAs, 401(k) and 403(b) accounts to pick up the slack. Don’t have enough? You’ll need to cut back on your expectations. Fortunately, the best things in life are free.
When to Retire?
The earlier you retire, the sooner you’ll have to start pulling money out of your retirement savings instead of growing the pot with your contributions. This combination of less growth and more drain on your portfolio can make a huge negative difference even if you retire only a few years early.
The earlier you retire, the longer you will live in retirement and the greater the chance that inflation will eat away at your standard of living. So, the earlier you plan to retire, the greater the importance of including inflation in your projections.
If you have a pension, retiring early may mean a lower pension check for the rest of your life. This is called a reduced pension benefit. Be sure to find out whether and how much your pension payout will be reduced if you retire at various early ages. If you have a survivor spouse, remember to also calculate the financial impact of a reduced pension benefit on his or her lifetime income.
You probably already know that you can start taking Social Security benefits as early as age 62. But do you know that, depending on when you were born, your Social Security check may be reduced by as much as 20% to 30% from your full retirement age benefit at age 65 to 67? Think carefully and seek professional advice from a financial planner before you sign up for your Social Security benefit.
Pitfalls of Not Being Emotionally Ready
- Loss of Structure – This is one of the biggest adjustments for retirees. Transitioning from very little free time to totally unstructured time can be staggering. Handling this takes a great deal of self-discipline.
- Loss of Identity – Many of us identify ourselves with our careers. Think of yourself as retiring to something, not just from something.
- Fear of Mortality – Notice that I did not use the D word. There is a lot of superstition around this topic. Those who feel their business is their life can actually feel that their life is done when they stop working. If this sounds like you, find a new challenge and/or ease into volunteer work.
- Marital Discord – There are a number of reasons why marital discord pops up when retirement strikes. In some relationships, the problems have been pushed aside when both spouses have been busy working. Once retired, the problems move to front and center. Then there is the traditional home where the husband retires to play golf or do what he wants to do while the wife is expected to continue doing the cooking, cleaning and washing. Resentment can drive her to file for divorce.
Your Social Network Needs Changing
There are a lot of social benefits to working. Once you quit working, you probably will be socializing less with your colleagues. Before you retire, start transitioning into replacement social networks through volunteering, workshops, place of worship and the like. Maintain contact with your new friends and keep making new friends. Be prepared for the inevitable losses as some friends move away.
I think we might all agree that feeling useful is a marvelous experience. We each have a lot of knowledge, skills, wisdom and abilities. There are many opportunities in this community to fill your hours and provide you with a sense of self-regard. If you don’t know where to start, just join Rotary.
Are You Ready to Retire?
If you are seriously thinking about retiring, do your research. Talk with people who are already retired. Figure out if you can afford the retirement you want. Ponder about whether you are prepared for this huge change in your life. Like the Boy Scouts, be prepared.