Are you prepared to retire? Many Americans would say yes, but others aren’t quite so sure. Unfortunately, some could be in for a rude awakening when the time comes. Here are three questions you should ask yourself now to make sure you’re ready and on the right track!
Do I have a large enough pile to continue my standard of living?
This might be the most puzzling and important question to ask yourself as you prepare for retirement. Unfortunately, this is also one of the more complex questions. A discussion with your trusted financial planner should help identify this amount and create a roadmap to get there.
At CPS Investment Advisors, we look at many dynamic factors to help arrive at each individual’s amount. We examine your current expenses and projected future expenses based off of family medical history, future travel, hobbies and then factor in inflation. With this amount in mind, we can then craft a plan on how to get there.
For example, if you are used to living off of $50,000 a year, in retirement you need to be able to replicate this amount and increase it yearly by 3% to keep up with the long-run history of inflation, which erodes buying-power. If you currently have a pile of $500,000 and planned to withdraw entirely from this account to live off of, you could run out of cash very quickly, potentially in less than ten years. Withdrawing the right percentage yearly is crucial to maintaining your pile. We recommend withdrawing no more than 5% a year from your portfolio to ensure you do not outlive your pile. Unfortunately, a 5% annual withdrawal on $500,000 is only $25,000, or half of what you were used to.
While you might have a good retirement balance right now, it might not supply you enough to live the way you envision. Planning early can mitigate emergencies or lifestyle changes in retirement. Consulting a trusted financial planner is crucial in planning for retirement income.
Do you have the right variety of investments?
The right mix of investments in your portfolio can have meaningful consequences on your retirement. As we age, our time horizon to retirement begins to shrink. We have less time to earn and save, or recoup any losses due to natural market fluctuations. Because of this, we have to plan and re-evaluate our mix as we age.
The investments and asset allocations of a 25-year-old beginning their retirement savings may not be the most appropriate mix for a 45-year-old, and probably not right for someone entering retirement.
The most crucial part of the plan is saving. Spend less than what you make, and always pay yourself first. Save in employee sponsored, tax deferred accounts first, many of which offer matches. The easiest way to get a raise is to contribute more money to your plan and get the match.
But after saving, you need to allocate responsibly. Your advisor and you should meet regularly, at least annually, to review your goals and risk tolerance to ensure your portfolio is invested correctly. There is no magic mix to investing for everyone, so consulting a professional can be extremely helpful.
How will you live in retirement?
If you knew exactly how long you would live in retirement, we could create the perfect financial plan. Unfortunately, very few of us know that exactly. We try to plan for at least thirty years in retirement, sometimes more. As you approach retirement age, you need to have a solid understanding of what your expenses are and if that is appropriate moving forward. It is better to start preparing early for a long retirement than to reach that day and be unprepared or outlive your money. Consulting a trusted financial planner can help with all of these retirement questions.