Most Americans will retire from full-time work at some point in their lives. Before that, though, they will likely spend close to 40 years in their respective careers and look forward to the time when they will have the financial freedom to make that choice to retire. Yet so many Americans reach the typical retirement ages unprepared for retirement in either their financial situation or their mindset, setting them up to not enjoy retirement.
Retirees used to have pensions to look forward to. They worked until they no longer could, usually in their 70s, then retired briefly on social security and a pension. Today, this is not the typical situation. People are retiring earlier either because they are forced out by their employer or because of their health. They also may choose to retire earlier in order to enjoy their retirement while they’re younger and still active. However, no longer having pensions to fall back on, most Americans will have to rely on their savings and investments.
There are some basic principles you can follow to help you prepare for to enjoy retirement. During your working years, it is important to realize delayed gratification and think long term for the future. Also, those last 5 to 10 years of work or the so-called retirement “redzone” years, should be marked by aggressive saving. This is also a good time to find passions and hobbies outside of work that you enjoy and that are fulfilling. These may not be and probably should not be all physical activities. Most people imagine themselves hitting the golf course every day during retirement, but their bodies may have other ideas.
You should also ask yourself certain questions: What does my retirement picture look like? Do I picture myself relaxing on the porch and not doing anything? Traveling the world? Playing golf? Or maybe spending time with family and friends? All of these are important questions to think of and to plan out before it is too late. Essentially, it is important to determine well in advance what you think your retirement living expense needs and wants will be.
A recent study from the Employee Benefit Research Institute (EBRI) found that the average retirement age is actually closer to 62 than 65. Of those surveyed, 47% decided to retire based on a health scare or due to a disability. Another 34% retired to care for a spouse or another family member. It is important to plan not just for discretional living expenses that will increase throughout retirement due to inflation, but also for the reality that the older you get, despite help from Medicare, the more health care expenses will eat into your retirement funds. A study by Fidelity stated that the average couple will need $295,000 in today’s dollar for medical expense throughout their retirement. This does not even include long-term care expenses like nursing home, assisted living, or home health care. Staying active could help prevent a forced early retirement as well as reduce expenses later in retirement. If your company has offered a Health Savings Account (HSA), consider choosing this option as an investment opportunity in order to help supplement increases in healthcare costs later in life. For 2021, you can contribute as much as $3,600 for an individual and $7,200 for a family. There is also a $1,000 additional catch up allowed if you’re over the age of 55.
As mentioned above, enjoying retirement and retirement success comes down to cash flow. This success is less about what your retirement number is and more about what your living expense will be. Can you live on what you make today? Maybe 80% of that amount? Or maybe even less? It is helpful to look at what you would like to achieve in retirement and inflate those number to keep pace with inflation. How will you want to spend your time? What have you dreamed about or put off in terms of life experiences or travel opportunities that you will be wanting to realize in retirement? After incorporating healthcare expenses into a future budget, don’t forget to add these dreams and desires into the equation as well.
In retirement, we want all liabilities paid off. That includes your house. This can be accomplished early on as we have discussed in the past by only taking out a 15-year mortgage or if you’re younger, a 30-year and making additional payments to the principal on the home. If you’re close to retirement and not in a position to refinance, then you should allocate additional money monthly or by a lump sum to have the mortgage paid off by retirement. This not only frees up thousands of dollars per month, but also provides peace of mind knowing you no longer have the obligation of paying someone else and can instead spend your hard-earned money on yourself and your family.
Vanguard did a study in 2020 and found that in over 5 million 401k plans, the average balance was $106,478. However, the median number was only $25,775. The average balance for individuals age 65 and up was $216,720, but the median was only $64,548. It is important to realize that 401k, 403b, IRA, Roth IRA are vehicles that not only provide some tax benefits, but also allow for compound growth over time. Remember: The best time to invest was yesterday and the second-best time is today. Let time be on your side and invest as early as possible. If you’re 50 and older, use this time to increase your contributions. Usually this is when we have the most cash flow due to advances in our career as well as fewer obligations as our kids are more grown up and out of the house or in college. The maximum annual contribution to a 401k for 2021 is $19,500 but you can catch up with an additional $6,500 or $26,000 overall if you’re over 50.
Do not fall for the noise and click bait scare tactics of someone selling an annuity of guaranteed income. In the later 1970s and early 1980s, clients could retire on fixed income portfolios providing close to double digit yields. However, record low rates today need to outpace inflation for 20 to 30 years in retirement and this can only be accomplished by investing a portion of your portfolio into the stock market. It is important to focus on the long term and not get scared during market pullbacks. While working, use the down marker as an opportunity to invest at lows. Stay dedicated and stay invested within your allocations. Do not go to more fixed income (bonds) or cash when things do not go as planned or the markets get volatile. Instead, continue to control fearful impulses and invest for the long term.
Most Americans spend the vast majority of their adult years waking up, heading off to work, spending long hours at the office, and returning home only to get ready to do it all again the next day. It can be a big shock when you’re no longer working and saving and instead living on your assets and social security. This can be tough for a lot of people as the absence of their work leaves them feeling unfulfilled. Therefore, it can be beneficial to find hobbies that you enjoy before you head into retirement. Another option to help the transition is to begin to work less and gradually work your way up to a full stop and full retirement. You may have thought you were looking forward to retirement, but the reality of all that “free time” can be a shock. Start learning now what it is you enjoy spending time on that is not work related.
There are various ways to prepare to enjoy retirement and most of them are not last-minute fixes. It is essential to plan now for both financial and mental success during your retirement years. Planning today allows you to one day enjoy retirement and live with financial peace of mind.
Matthews Barnett, CFP®, ChFC®, CLU®
Financial Planning Specialist