Thinking of Retiring?

Mercedes Givens, CFP®

Director of Financial Education

Last Updated
January 18, 2023
Grandpa contemplates retirement as he plays with grandson

Ask Yourself These 3 Questions

Retirement comes with many uncertainties. As you begin to think about retiring, you may wonder, “Do I have enough saved?” “Will I be able to live the lifestyle I want?” “How should I plan for unexpected expenses?” “Will my loved ones be okay?” “Can I retire early?” and more.

These questions are normal and to be expected, but there are three main questions you should ask yourself to determine whether you’re currently in a position to retire.

Question #1 – Am I financially ready?

This is one of the biggest questions we help our clients answer, and there are a lot of factors to consider when determining the correct response. To start, it’s important to gain an understanding of where you currently stand versus where you hope to be in retirement. Consider the following.

  • Your potential retirement income – Start by estimating how much monthly income you can likely expect to receive in retirement. You may need the help of a wealth manager to determine this amount. At Creative Planning, we take a look at your Social Security benefits, investment and retirement accounts, pensions and other company-sponsored benefits, HSAs, and any additional sources of income (rental properties, etc.). We also consider your life expectancy, time horizon and other factors as we help you determine how much you can reasonably expect to receive in monthly income.
  • Your potential expenses – On the expense side, we help estimate how much you can plan to spend each month, based on both your expected non-discretionary expenses (housing, healthcare, food, transportation, utilities, etc.) and discretionary expenses (hobbies, travel, gifts, etc.). If your potential expenses exceed your retirement income, you may not yet be ready to retire.
  • Income-replacement ratio – Another helpful data point to consider is your income-replacement ratio, or the percentage of your current salary you would need to generate in retirement in order to live comfortably. We typically recommend that clients plan to replace approximately 80% of their pre-retirement income. However, this percentage varies widely based on each client’s retirement goals and desired lifestyle.
  • Assets divided by salary – An additional way to determine if you’re financially ready to retire is by diving how much you’ve saved for retirement by your current salary. A general rule of thumb is that you should have approximately 10 times your salary saved at retirement, eight times your salary by age 60, six times by age 50, three times by age 40 and one time by age 30.
  • Run projections based on various scenarios – One of the best ways to determine whether you’re financially ready to retire is by having your wealth advisor run retirement projections based on multiple situations. By adjusting factors such as your life expectancy, monthly income needs, healthcare expenses, estate planning goals, etc., you can stress test your retirement savings to determine whether you’re comfortable with the results.

Question #2 – Am I emotionally ready?

As important as it is to get all your financial ducks in a row before you retire, it’s equally important to ensure you’re emotionally and psychologically ready for this next phase of life. Retiring is a major life change, and many retirees are surprised to discover that, as much as they’ve looked forward to leaving the workforce behind, retirement isn’t all sunshine and rainbows. In fact, if not properly planned for, retirement can be a lonely and isolating time of life.

Before you retire, take time to really consider your priorities and how you wish to spend your time. Don’t just plan to retire from work — also plan to retire to something that brings you fulfillment. You don’t have to keep up with your current “go, go, go” lifestyle in retirement, but you should have a reason to get out of bed each morning. Perhaps you make a plan to volunteer regularly for a favorite charity or take on a part-time job doing something you’ve always wanted to try. Maybe you see yourself traveling, helping care for grandchildren, playing pickleball, ballroom dancing or pursuing other hobbies on a regular basis.

Whatever your priorities and passions are, make a plan to structure your retirement around the things that bring you fulfillment and a sense of purpose.

Question #3 – What’s my plan for monthly income?

Making the shift from saving to spending in retirement can be difficult. Before you retire, it’s wise to have a plan in place. There are three main strategies often used by retirees to establish a monthly stream of retirement income. Your wealth manager can help you determine which strategy is right for you.

  • Dividend strategy – A dividend strategy involves building a portfolio where the average dividend is enough to satisfy your income need each year. This strategy makes sense when investments are delivering adequate dividend income. However, a problem arises with this strategy when an investor’s income requirements are higher than the dividends provided by a diversified portfolio, because the investor may be tempted to search for investments that pay higher dividends. This act of “yield chasing” can result in a portfolio that’s heavily overweighted in slower-growing sectors, such as telecom, utilities and consumer staples. While these sectors have the potential to provide larger dividends, they typically don’t offer the price appreciation necessary to help your income keep up with inflation over time.
  • Systematic withdrawal strategy – This strategy simply refers to a scheduled withdrawal from your investable assets, based on a reasonable withdrawal rate. Retirees in their mid-60s will typically begin by withdrawing no more than 4% of their retirement savings their first year and will adjust that dollar amount for inflation each year after that to maintain their spending power. Of course, your exact withdrawal percentage will depend on how much savings you have, your lifestyle goals, your life expectancy, your legacy goals, etc.

The key to this approach is maintaining a diversified investment portfolio. While stocks are typically more volatile than bonds, they provide the potential for growth within your portfolio, which is important in helping you keep up with inflation. On the flip side, an allocation to bonds or other conservative investments can help protect your nest egg during periods of market volatility.

In order to extend the longevity of your portfolio, be sure to work with a qualified wealth manager to help you determine which investments to draw from based on the current market environment. For example, you’ll likely want liquidate stocks when the market is up and bonds when the market is down. It’s also vital to protect your short-term income (usually five to seven years of expenses) from market volatility by investing in less-volatile assets.

  • Tax-efficient withdrawal strategy – If your retirement assets are diversified across multiple account types (such as IRAs, 401ks, Roth IRAs, taxable accounts, etc.), you may have the ability to optimize your retirement income by implementing a tax-efficient withdrawal strategy.
  • Taxable (non-retirement) accounts – These accounts offer the benefit of lower dividend and capital gains tax rates as needed.
  • Tax-deferred retirement accounts, such as IRAs and 401ks – While allowing for tax-deferred growth, these accounts are subject to ordinary income tax consequences whenever funds are withdrawn.
  • Tax-exempt accounts, such as Roth IRAsThese accounts allow after-tax investments to grow tax-free for as long as possible, and qualified withdrawals are tax-free.

As you structure your tax-efficient withdrawal strategy, it’s important to consider not only your different account types but also the tax brackets you expect to be in over time. Many retirees start retirement in lower tax brackets, but after starting required minimum distributions (RMDs) at age 72, they discover they’ll likely never see those lower tax brackets again.

Could you use some help determining whether you’re ready to retire? Creative Planning is here for you. Our experienced professionals help clients make smart financial decisions that take into account a wide range of personal and economic factors. We’re happy to help you determine a retirement strategy that makes sense for your personal financial situation. To get started, schedule a call with a member of our team.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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