Rethinking Retirement: Simple Answers to your Most Complex Questions

Rethinking Retirement: Simple Answers to your Most Complex Questions

November 08, 2022
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Some people feel joy at the thought of it, and others feel a sense of dread. Some are counting down the days, and others are waiting in fear. What could possibly be so profoundly personal and polarizing that even the word itself strikes an emotional response? Retirement.   

As financial planners and specialists in helping very successful people transition into this chapter of life, we’ve heard it all. We’ve witnessed a client get teary-eyed when told that they could retire early after years of working tirelessly. And we’ve acted as a support system for someone who sold their business for a significant profit but then faced an unknown future that surprised them. We often find that there are a handful of questions that keep people up at night as they contemplate retirement. But often, the answer can be more straightforward than they think.

Here are the five biggest questions that we hear from those nearing retirement and the answers we share to help them rest easy.

How do I know when I am ready to retire?

There is a lot more that goes into being retirement-ready than a six or seven-figure 401k balance. And it varies from family to family, but some key indicators are:  

  • You have had time to mentally prepare for this radical change in your Monday – Friday routine and plan how to spend this time. Even if you are financially capable of retiring, make sure it aligns with your purpose and goals. Retirement can be a magical time, but without a plan on how to spend at least some of those additional hours that you used to be working, it can quickly become lackluster and deteriorate your quality of life.
  • You can create (or have created) a retirement budget that allows you to maintain your lifestyle on your post-retirement income. Don’t forget to add “wants” like travel, shopping, and dining out to your budget. We hear pre-retirees say that they won’t spend as much money in retirement, but the reality that we see is when every day feels like Saturday, that isn’t usually the case.

I get a paycheck now (either from my employer or the business that I own). How should I think about a paycheck in retirement?

From one day to the next, most people who work for a company will go from earning a paycheck to having to create one.  People that we work with have multiple sources of income in retirement that are typically a combination of the following:

  • Retirement Accounts (401k / 403b / IRA / ROTH IRA / ROTH 401k): These are investments that have been saved through a work plan.
  • Regular mutual funds / individual stocks: These investments may have been inherited or saved through your working years or the result of a sale of a business.
  • Social Security: Nearly anyone who has worked will collect social security.
  • Pension: Although not many of those exist anymore through corporations, members of the military or state and federal employees might be eligible for pensions.
  • Annuities: Some retirement plans include annuities and some pre-retirees might have purchased them in the past.

Nearly all of these vehicles are taxed differently and managing the taxes in a retirement paycheck is important.  Social security (and in some cases, pensions) often form the base income in retirement. Some people choose to turn an annuity into an income source as well.  These income sources form a percentage of a retirement paycheck. Then investments are sold from other accounts (both retirement and non-retirement) until the amount of the ideal monthly paycheck has been reached.

It gets more complex once taxes and market fluctuations are part of the equation, but this is the standard formula for creating a retirement paycheck.

What effect does the state of the market have on my retirement age?

The good news is that the performance of the stock market does not directly impact your Social Security benefits, but social security may only be a tiny part of your retirement paycheck.   The markets may still influence the age at which you wish to retire.  For example, stocks and bonds were down last year, and inflation is high. This creates a “Sequence of Return” risk that occurs when someone withdraws money early in retirement from a portfolio that’s declining in value. They are at greater risk of depleting their nest egg too soon.  We feel the five years before retirement and the first five years of retirement are the most fragile in terms of being sensitive to market downturns and can be critical years for how investment accounts are allocated.  While this does not create an ideal time for starting retirement, there are ways to work through it, such as creating a liquidity plan.

One critical mistake we saw in the Great Recession of 2008, and fear could be happening again now, are couples pulling out of the market and into cash when the market was falling. In some instances, they didn’t get back into the market until it was well on its way up, which means they sold low and bought high.  People tend to think they have “lost money” when the market is down, but the reality is that you have only lost if you act and sell. They make emotional decisions instead of trusting experts to guide them through this season. It is critical to talk to an advisor about either holding off on retirement for the time being or utilizing alternatives like cash reserves to supplement income.  

What happens if my spouse or partner dies?

These situations are always heartbreaking and an important part of our planning process. We were hired by a couple in their 60s. Little did they know that the husband would pass away three years later. Because we had worked closely with both of them during that time, his wife knew the plan and could continue the vision they had created together and she had partners to help her make decisions. She was able to stay in her home, fulfill their goal of taking the grandkids to Europe, play golf often, and remain involved in her community and their grandchildren’s lives. In short, she grieved the loss of her husband, but she did not have to change her lifestyle because of financial reasons.  Her financial plan absorbed the loss of one social security and tax implications because we had planned for it.  

Unfortunately, this isn’t always the case. It’s not uncommon for one household member to primarily manage the finances. There is nothing worse than the feeling of losing a spouse and being surprised by a financial situation. The easiest solution is to work with an advisor that has a strong relationship with BOTH individuals, so if that day comes, there is a trusted ally to help lead the way. A great team will hold your hand and walk you through all the financial (and many non-financial) aspects of your new life.  They will also have plans mapped out and help manage the financial repercussions of losing a loved one. When in doubt, surround yourself with a strong support system.

Other than my finances, what do I need to do to prepare?

In addition to a solid financial plan, the most essential preparation is determining what a successful retirement will look and feel like.  It’s important to think about your values and to ask yourself what you hope to achieve in retirement.   How will you know if you are succeeding in retirement?  What will your new routines be?  What will your social networks be like?   

Many people are used to the rigid structure of the working world. Once that is gone, they feel lost and alone. In fact, 46% of retirees struggled to find their new purpose, according to a study by the retirement think tank Age Wave. It’s important to retire “towards” something and not “away “ from “the grind” of your daily job.  We encourage our clients to use their values to find that new purpose. One that gives back to them through social interaction, relaxation, or mental stimulation and gives back to the community in a way that aligns with their bigger purpose. This may not happen immediately; it’s essential to experiment and find the right fit. Research suggests that it takes about two years to settle into retirement.

These five questions just scratch the surface when it comes to retirement, but the important takeaway is that when you have a financial plan and a Purpose Plan, retirement can be the next chapter you always dreamed of and more. Ask the right questions and know that you’re not in it alone. This can be a challenging transition, but your hard work will pay off in the end.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.