If you’re an AgingOptions regular, you’ve heard us say a hundred times that retirement planning and financial planning are not synonymous. But repeatedly we come across articles here at the AgingOptions Blog that seem to reinforce the narrow and short-sighted view that all you need in retirement is plenty of money. Not true, says Rajiv Nagaich!
We recently read another article along this line here on the US News website, written by reporter Rachel Hartman. The title is all about retiring early, something many hope to do one day, but the subtitle gives away the thrust of the article: “Make sure your finances are in order by following these tips to retire early.” As soon as we read an admonition like that, our antennae go up. Let’s take a look at Hartman’s eight-step process toward preparing for early retirement and see where she made good points – and where she might have missed the mark.
Early Retirement Seen as “a Path to Freedom”
In her US News article, Hartman begins: “Many people see stepping away from the workforce and into retirement as a path to freedom. If you want to retire early, you might be able to enjoy hobbies, spend more time with family and get involved in charity work.” The lure of that so-called freedom can be a powerful temptation.
But there’s real danger if you enter retirement unprepared. Hartman adds, “To get ready, you’ll want to make sure your finances can support you and your household for the next decades.” With that limited focus in mind, here are the eight things she encourages early-retirement-seekers to focus on:
Practice Your Vision of Retirement
The first three of Hartman’s points will sound familiar to AgingOptions blog readers. She starts with the need to have a vision of just what retirement living might actually look like for you.
“If you have an idea of what you want to do in retirement, consider trying out some of the activities,” Hartman writes. For example, if you’re planning to travel the country in your RV—but you’ve never really spent much time in one before—take time to try it out! Better to find out whether you love it or hate it now, rather than figuring it out when it’s your only retirement plan.
Eric Ross of Madison Wealth Management in Cincinnati says, “Practicing retirement provides an opportunity to sample things that you may want to spend more time experiencing during retirement.” We can’t help but agree: don’t enter these important years without thinking ahead.
Consider Your Purpose
We’ve shared countless articles before about finding your purpose in retirement, and we’re grateful that Hartman brings it up here in her US News article. “During the working years,” she writes, “you may have felt like you were carrying out important tasks or meaningful work. Knowing your purpose is often just as important in retirement.”
Think you’ll just “figure it out when you get there”? Think again, says Ross.
“The real danger is for those that think they will figure this out during retirement,” Ross says. “I have seen transitions to retirement be more successful when there is a defined purpose or at least a plan to find one’s purpose.”
There are many ways to develop a purpose for your retirement years, but Hartman suggests zeroing in on activities that fit your gifting and passions. If you have been a teacher, try mentoring students. If you like being around older people, you could volunteer to help support other seniors that have reduced mobility. And when it comes to finding purpose, don’t overlook the power of spending more time with your loved ones. Your influence can provide invaluable benefits to kids and grandkids.
Be Aligned with Your Family
Think your family is all on the same page about your retirement plans, even if you haven’t made those plans clear? Not so fast. You could be in for a rude awakening, especially if your retirement plans revolve around your adult children.
In her article, Hartman writes, “If you plan to move during retirement to be near children and grandchildren, talk to relatives beforehand. Go over any expectations, such as helping with child care or getting together frequently. You may find family members are looking forward to your transition or that they may want more space. Couples will want to make sure they agree regarding where to live and how to spend money.”
Know How Much You Need
Though finances aren’t the be-all, end-all of retirement (more on that a bit farther on), Hartman’s advice here is sound, if pretty basic. It’s important to be realistic about what you earn annually and how much you’ll really need during retirement to be comfortable.
“How much you want to live on will determine how big your nest egg needs to be,” says Pennsylvania-based financial adviser Stephen Landersman. He uses a rule of thumb which sounds simplistic to us, suggesting that retirees “will need to accumulate about 35 times the income they desire for their retirement lifestyle.” In our view, that’s a debatable figure.
But realistic budgeting is essential. For example, if a part-time job is part of your retirement income, make sure that’s factored into your future budget. “You’ll also want to account for inflation and the impact it could have on your savings,” Hartman writes. “If inflation is higher than the return you receive on your investments, your ability to maintain your desired lifestyle could become difficult.”
Of course, this is where a financial dashboard becomes indispensable, we would suggest. We’ll have more to say in a bit.
Establish Your Savings Strategy
In her US News article, Hartman explains that your strategy on saving and investing is affected by your retirement hopes and dreams. She writes, “Some individuals choose to follow the FIRE ( Financial Independence Retire Early) movement to retire early. If you use this path, it could mean setting aside a substantial percentage of income each year, such as 50 percent or more.” For those with less aggressive goals, saving a lower percentage of income will likely suffice.
Financial planner Landersman adds that your long-term goals also affect today’s spending habits. “The earlier you want to retire, the more frugal of a lifestyle you need to have in the accumulation phase,” he told Hartman.
Have Access to Funds
As you plan ahead for that dream of early retirement, don’t get so consumed with saving that you ignore liquidity. Your workplace retirement plan is a good example. Tying up all your money there might impact your hopes to leave the workplace earlier than most.
“If you’ve contributed to a 401(k) or retirement account that has early penalties on withdrawals before the age of 59 1/2, look at how your other funds are allocated,” Hartman writes. A brokerage account generally offers greater flexibility and ready access to cash.
Hartman spoke with Houston Friend, a financial planner and tax professional for Arizona-based firm Redeem Wealth. “Having enough of your portfolio invested in taxable brokerage accounts allows for a lot of flexibility to withdraw without penalties before age 59 1/2,” he says. “These accounts are also taxed at capital gains rates instead of ordinary income, so it can be very tax-efficient.”
Evaluate Ways to Earn More
If early retirement is your dream, instead of jumping straight from work into no-work, Hartman urges thinking about other ways to make money, both before and during retirement.
“This might come through working extra hours, starting a side business or upping your salary,” she writes. “There could be an appeal to work on a temporary basis in retirement. This could help with the transition and allow you to stay active and engaged. Some individuals use a few hours of their time each week to be a consultant, especially if they have an area of expertise and years of experience in an industry niche.”
As You Plan, Stay Flexible
Hartman cautions readers not to become rigid in their planning but to stay flexible. “While it can be valuable to create plans,” she writes, “there are many factors that could change the trajectory of your lifestyle in retirement. If you’re not eligible for Medicare, you may need to pay for health insurance premiums, deductibles and copays, which can fluctuate.”
That spirit of flexibility extends to the very idea of early retirement, Hartman continues. “You might also feel a sense of boredom and want to head back into the workforce,” she cautions. “Some early retirees struggle to connect with others, as many of their peers are still deeply immersed in their careers. At the same time, you may find you’re able to retire earlier than expected and have even more years to enjoy the road ahead.”
Rajiv Replies: “It’s About Much More than Money”
We asked Rajiv Nagaich of AgingOptions for his view on this article, and he was somewhat unimpressed. “This article is like hundreds of similar ones I’ve read,” he says. “Want to retire early? All you need is a dream and a whole lot of money. Well,” he adds, “I’ve got news for you: that kind of thinking can easily become a recipe for disaster.”
The biggest reason for his skepticism, Rajiv states, is that there’s a long, long list of people who died with plenty of money but who were unable to live how they wanted to live – simply because they never planned comprehensively. “First, you have to think beyond money,” he says. “Finances are important, of course, but even those who retire early are going to grow older. Housing is going to become a critical issue. Your health is a major consideration – you need the right insurance, both for today and for the long-term. You need to have your legal affairs in order. You need to make sure your loved ones will be supportive – otherwise you can quickly become a burden to those closest to you.”
Rajiv’s advice is two-fold. “For solid financial planning – no matter when you hope to retire – get together with a fee-based professional planner and have them develop a financial dashboard, so you can really get a handle on your financial future. Second, come to a LifePlanning Seminar and see what comprehensive retirement planning actually looks like. I guarantee you,” he adds, “you’ll never think about retirement the same way again.”
My Life, My Plan, My Way: Get Started on the Path to Retirement Success
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(originally reported at https://money.usnews.com)