As we approach the latter years of our career, thoughts of what retirement will look like can be a source of mixed emotions. For many, this will be a time to dream about doing those things on their bucket list they’ve been waiting to do. It could be traveling abroad, learning a fun hobby, making memories with grandchildren, or pursuing a new business venture. For others, this could also be a time of stress and uncertainly, given how much of our identity has been tied to our career success and advancement.
We have routines and structures that we have followed for years, and now we face the reality that is all about to change.
For most approaching this next phase of life, there are four questions that will keep people awake at night searching for answers. Over the years, I’ve found that these four questions can encompass what many pre-retirees feel the need to know and be prepared for. Knowing the answers to these questions can provide confidence that people are prepared to make this a good transition.
Question No. 1: When Can I Retire?
This seems like one of the most universal questions everyone will ask themselves at some point, but how do we actually know when we should begin this next phase of life? Do we seek direction from friends, family and colleagues to help guide us? Maybe it’s our health that dictates our decision.
Question No. 2: Will I Have Enough Money?
What is that “magic number” that makes it OK to retire? More importantly, what is YOUR “magic number.” Emotionally, it can be tied to a vision you’ve had your entire career, such as accumulating $1 million or paying off your mortgage. Maybe it’s selling a business you’ve worked years to build or inheriting a large lump sum.
However, there is certainly no one-size-fits-all answer to this question. Begin by having a budget specific to retirement and understand what percentage of your monthly expenses can be covered by fixed sources of income, such as Social Security, pension, annuities, etc. The closer this percentage is to 100, the better.
Also, make sure to separate the purpose of your money and specifically dedicate it to such things as creating monthly income, covering future health care costs, and growth to outpace inflation. By separating the purpose of your nest egg, you will be better able to allocate your portfolio appropriately among various tools, such as savings, investments, annuities and life insurance to name just a few.
Question No. 3: Will It Last?
Will my nest egg last throughout retirement? One of the most significant risks for retirees is having negative returns in their investment portfolio during their early years of retirement. Unlike your working years, when you may have been contributing money to your retirement plan on a regular basis, now the opposite may occur, where monthly withdrawals may be necessary to generate needed income. This is referred to as a Sequence of Returns Risk, where the order in which the annual returns hit a portfolio matters significantly. You can see the difference in outcomes from the example below, when the average annual rate of return is the same for each portfolio but the order in which the returns happen is reversed.
The best way to manage this risk is to avoid taking systematic distributions from a fluctuating account. Dedicate a portion of your portfolio to create the monthly income needed to cover fixed expenses that are beyond what your Social Security and pension will provide. Once you know this number, you are ready to determine what combination of investments and insurance tools are right for you.
Question No. 4: Will They Be OK?
This is especially relevant for most couples. We all want to know that if we pass away, our spouse will be OK and will be able to carry on. It’s even more important to know the answer to this question if the spouse who passes first was the one who took care of overseeing all the family finances. Most often, one person in the relationship takes on this responsibility, which can provide organization and sense of order in the household. However, it’s essential to ensure that both spouses are comfortable with the family adviser and where to turn when life happens. Trust can take years to develop, so make this a priority while you are both healthy and able. Meet often enough to develop the trust needed for both partners to feel comfortable.