We all probably dream of retiring and never having to get up at 6 a.m. on a Monday. However, when the time comes, it can still be psychologically daunting to make the decision to stop having money come in the door. Many people have trouble switching from a savings mentality to a spending mentality where they begin depleting assets in order to live.
There are moves you can make to help you psychologically and tactically for making the change. However, preparing for retirement is not something that can be done six months or even three years before you retire. Ideally, you should begin preparing for retirement at least 10 years prior.
First and foremost, you need to start with a budget. You need to know what you currently spend by first listing your mandatory expenses, such as, mortgage or rent, car payments, health insurance and average utility bills. Then list your discretionary expenses, like travel, entertainment, golf or tennis clubs and dining out. Next, determine what you think you’ll spend in retirement and any goals you may have. We often find that in the early years of retirement, couples can spend more than when they were working because they have the time to explore new activities and go on vacations—many of the things they couldn’t do while employed. Spending often tapers off after a few years, but then eventually increases again as they age because of increasing health care costs.
Experienced financial experts can help you develop a financial plan that includes a cash flow analysis, which can help you identify the years in which you have cash flow gaps. These gaps, or liquidity needs, are the difference between your after-tax income, which may include Social Security benefits, military benefits and pensions, and your desired after-tax spending for any given year. Gaps are filled by your assets in company-sponsored retirement plans, annuities, and your own investments and savings. If your first year of retirement is about 10 years away, now may be the time to begin shifting some assets in your portfolio to fixed-income investments that are not subject to the volatility of the stock market. Consider laddering bonds that mature close to your retirement date and the years thereafter.
When mapping out those liquidity needs, you need to use a certain set of assumptions for inflation rates, the rate of return on your investments and future tax liabilities. While your assumptions will not be completely accurate, using conservative assumptions, such as a 4% to 5% inflation rate and a 5% to 7% annualized growth on investments, should help you determine how much you need to maintain your gap through an assumed life expectancy. Keep in mind, you may live 20 to 25 years or longer in retirement.
If you see a point where your funds may fall short, you should still have time to adjust your plan. In your 50s, you can make additional catch-up contributions to your 401(k) and your IRA to add to your retirement nest egg. If you are working with a financial adviser, your adviser should be able to run multiple scenarios and may suggest areas where you can trim your expenses.
Knowing that your money is projected to provide for your retirement lifestyle can make transitioning to retirement easier. If you want help determining if your liquidity needs will be covered in retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
