There are lots of ways to think about retirement, from excitement to dread to worry, to all of the above at various times. With my clients, I find it helpful to provide some wisdom that can guide their thinking as they approach this major life change. Here are four truths about retirement that I like to share:
- It’s about options, not money. I suggest to clients that they think about freedom and flexibility instead of a dollar amount when setting a retirement goal. If you have Social Security and a pension, you may need only a few hundred dollars a month from savings to cover your needs. If you don’t have a pension, you will need to rely on savings more. If your needs for housing, food and healthcare are lower, you have more options with the same savings.
- Spending is more powerful than earning. If you are trying to increase your retirement choices, there are a couple things to consider. Every year you delay retirement adds a lot to the bottom line:
- One more year of additions to retirement savings, upwards of $30,000 depending on your savings rate.
- One year less of retirement spending, upwards of $70,000 depending on your spending plan.
- One year more of compounded growth on the entire retirement nest egg, around 3 percent.
It’s important to be very thoughtful about drawing on your savings nut. If you reduce your monthly needs to less than your Social Security income, you don’t need to touch savings. In a good year you can spend savings, but in a bad year you can wait.
3. Good things come to those who wait to take Social Security. Your Social Security income benefit base increases every year you wait to start taking the money. When you reach age 70 the annual base increase stops. Once you begin taking money, your annual benefit will be increased annually based on the Social Security Administration cost-of-living factor. You and your spouse should review your exact situation and compare claiming strategies. Who claims first and how you claim can make a huge difference in the total benefit.
4. Think of retirement spending as “needs” and “wants.” It’s good to separate your monthly expenses into “needs,” (the things you must do every month to keep going) and “wants” being everything else. If you can use Social Security income combined with conservative investments to cover all your needs, you do not need to worry about market fluctuation limiting your lifestyle. Invest the balance of your investments for growth and use annual growth to fund your wants for the next year. When markets are down, you have the option to put off some optional spending.
You might get the idea that creating a retirement strategy that fits your family is sort of complicated. You are right. Creating a lifetime income plan to cover all your needs and wants involves plenty of variables and some tough calls about your priorities. If you really want to get your head around how to think about retirement, I suggest you talk with a highly trained, experienced financial planner like a CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.