The concept of retirement is unique to everyone. For millions, retirement is a goal and something to strive for. For others, it creates anxiety.
Generally speaking, to address the monumental decisions around how and when to retire, it’s wise to begin those conversations years before your target date. You can also engage with your financial advisor, therapist, or spouse. If the concept of not working in retirement isn’t one that you embrace, simply insert the phrase ‘life goals’ and engage in constructive dialogue around how to accomplish this without worrying about money.
When I talk with people about their life and retirement goals, three questions often surface. Below I list them along with strategies to deal with each:
How will I spend my time?
During our working years, the concept of retirement is often idealized as a finish line. But as that decision day nears, it is common to question what the next phase will bring. Oftentimes, the source of that anxiety is about what to do with that soon-to-be available extra time. To be sure, this is a good challenge to have, but some people are so paralyzed with the fear of having too much time on their hands that they simply choose to continue working.
A helpful strategy to reduce this concern is to write down your hobbies, interests, places you want to visit, health initiatives, social clubs you want to join, and new adventures that you have only heretofore dreamt about. Visualizing in a positive way what your days will look like will give you a more tangible structure that can help reduce the worry about not having enough to do.
How will I feel when my investment balance declines?
For decades near-retirees have saved and invested for the long-term. During this time, many investors focused on their rate of return and account value.
However, during the ‘withdrawal phase’ money is withdrawn to fund living expenses. With inevitable market volatility and current low interest rates, withdrawals from investment accounts can lead to declines in account balances.
Watching the result of a lifetime of hard work decline can lead to an emotional response. Emotion is the enemy of the individual investor so understanding that account values can decline (sometimes substantially) in retirement may help better manage those uncertain times.
A helpful idea can be to learn more about the concept of a Sustainable Withdrawal Rate. While more space is needed to give proper understanding to this concept, a Sustainable Withdrawal Rate is the percent of a portfolio that can be withdrawn each year without putting a lifetime income stream at risk.
A tangible strategy to deal with portfolio declines is to identify the amount of monthly income that is derived from more reliable sources (e.g., social security, pension, annuities) and take comfort from having those sources in your retirement arsenal. If this amount isn’t a sizable percentage of your target retirement cash flow, consider taking steps to secure more reliable income. And, depending on their suitability for your unique situation, municipal bonds and other high quality fixed income source can also be a source of emotional comfort (albeit with potentially lower interest rates).
How long will I live?
To many, this sounds like a silly question. But planning for longevity risk is increasingly important. Longevity risk relates to risk of living a long life and running out of money later in life.
This concept is increasingly important for millions of Americans who are living longer. Running out of money is often cited as the number one source of anxiety for seniors – even greater than the risk of death.
Understanding longevity risk dovetails into why the Sustainable Withdrawal Rate is so important. Managing investments and withdrawals in a prudent manner so that you will still have assets generating income in your later years is paramount. This is even more true if you are retiring on the early side.
Having a sense of your life expectancy can help with the decision of when to start social security withdrawals. Take an honest assessment of your personal health history, your family history, and your current lifestyle. For example, if you think you may live a long life, then consider delaying your social security start date (thereby increasing your monthly benefit), and/or delay withdrawals from your retirement account (which should help preserve more of your asset value).
Each person’s situation is unique and there is no ‘one size fits all’ retirement strategy. But knowing yourself and your emotions can help make a positive difference in the success of your retirement plan.