Shifting Toward Retirement

As you get closer to retirement, you will typically shift assets from higher-risk investments to lower-risk investments. This scenario, however, is not set in stone and will depend on how much money you are talking about, your style of investing, and your expenses. Depending also, in part, on your personality and comfort when it comes to risk, you may already be in a “safe” investment mode. In conjunction with shifting your expenditures and investment strategies, you will have to take into account the changes in your sources of income. On top of that will be external factors that you have no control over. You can still roughly plan for such potential factors as you go. The bottom line is to start looking at how you will get from point “A,” your current financial situation, to point “B,” your retirement lifestyle. To do so, you’ll have to take into account the positives and negatives that can be anticipated along the way.

“You should make a comparable list of anticipated expenses and costs for your retirement years.”

Don’t stop at income and expenses. Additional factors you should also consider are your investment portfolio, defined retirement plan, pension, Social Security, life insurance, wills and trusts, health insurance coverage, and so on.

When we meet with people, we look at the household income and assets including savings accounts, money markets, and investments. As mentioned earlier, in trying to determine someone’s net worth, I don’t like to include home equity because it is not a foregone conclusion that someone wants to sell his or her home. Nor should it be presumed that the next place of residence will be less expensive.

Naturally, your plans will change over time. However, having a plan, no matter how tentative, is better than not having one at all. It’s akin to having a road map. It may not be easy to follow, and you still might veer off course, but it’s better than having no map and no idea which direction to take.

In the past, retirement experts generally agreed that you would need between 70% and 80% of your pre-retirement income to maintain your standard of living after you stop working. Today, between the effects of inflation, a longer average life span, and more active retirement lifestyles, this formula may be too simplistic. You may need as much as 90% or even 100% of your current income during your retirement years, especially as you make the initial transition. It is also important that you factor in all the emotionally driven “costs” associated with retiring, such as leaving a legacy to children and grandchildren or a large endowment to a favorite charity or university, world travels, or shooting under 80 for 18 holes of golf. These need to be factored into your retirement income requirements. Therefore, you should make a comparable list of anticipated expenses and costs for your retirement years. Naturally, some costs will remain the same as they are presently, such as basic necessities. However, your change in lifestyle will dictate where the money will go. Follow your goals, and include the areas that will matter most.

It is possible that mortgage payments will likely no longer need to be included. Don’t be so quick, however, to eliminate other areas such as car payments. Even though your current automobile may be fully paid off, it is unlikely that it will last you another 10, 15, or 20 years. You will likely be purchasing another vehicle during your retirement years. While you might be trading in a family-sized SUV for a more practical smaller car, you will still incur some additional expense.

Plan on the basis of practical and realistic dreams and goals. You need not try to “cut corners.” On the other hand, you most likely won’t be enjoying the lifestyle of Donald Trump or Bill Gates. Few people do.

Spending More?

You may not believe it at first, but it is very likely that during the first two years of retirement, you may be spending more money than you do now. Often, people shake their heads in disbelief. However, I’ve seen numerous examples of couples and singles who leave the workforce and shift into their retirement lifestyle with many new activities and plans on their “to do” lists. Those 40-hour workweeks may have limited your ability to go out and spend money enjoying your hobbies, spoiling your grandchildren, and doing all the things you’ve wanted to do. As it turns out, there are plenty of ways to spend money when you have the added time to go out and enjoy hobbies, grandchildren, and even new business ventures. There’s no need to panic. Simply plan for a little “retirement spending spree” for the first year or two before you settle into a more balanced lifestyle. With proper planning, the money will be there for you to enjoy.