By Marc C. Shaffer
The idea of retirement and the reality of retirement can often be drastically different. For many people, retirement is the idea that at a certain age you will leave your career and enter into a life of leisure. Be it golfing, visiting sunny locations or spending time with grandchildren, retirement has been painted as the final phase of life where you haven’t a care in the world. Every day I talk with people who are retired or planning their retirement, and let me tell you, it’s time we start thinking differently about retirement. The 17th Annual Transamerica Retirement Survey showed that a majority of workers dream about traveling, spending more time with family, and pursuing hobbies, and 28 percent dream of doing some form of work in retirement. What does retirement mean to you? Does waiting until normal retirement age to pursue your dreams make sense to you, or would you like to consider an “alternative” retirement? The “what you want to do” and “how much you’re going to need” may look a lot different than you’re prepared for, so considering which type of retirement is right for you and the financial considerations to get you there are key. Let’s look at 5 types of retirement styles I talk about frequently:
1. Full Traditional Retirement – This form of retirement most closely resembles the way many people think of retirement. You circle a date on the calendar on or after your “normal retirement age” as it relates to Social Security to exit the workforce and don’t look back.
Financial Considerations: Traditional retirement generally requires you to save early and often to reach the amount needed for your nest egg. In this form of retirement, you are no longer going to work to bring in a salary, so other sources of funds are required to meet your living expenses and those sources are usually planned and prepared for use long before your retirement date. A combination of your employer-sponsored retirement plan, Social Security, Individual Retirement Accounts (IRAs), pensions, and other savings may be utilized to meet your cash flow needs.
Review your budget frequently and your retirement needs at least every 3 years, or as major changes arise, so you stay on track during your working years. Chances are that a “save 5% forever” mentality will not get you to your goals. By monitoring your cash flow and really determining how much you spend now, how much you can save, and how much you may need in retirement, you can have a better plan for being financially secure. Consider increasing the amount you save as large payments stop, such as when you’re done paying off your house or your children’s education. Having a mindset to always save and increase your savings whenever possible can help you reach your retirement goals.
2. Early Retirement – Early retirement can be defined as retiring any time prior to the “normal retirement age” and remaining out of the workforce.
Financial Considerations: With fewer years to save for retirement, a strategy for generating income from your investments in retirement will be important. Many people are often surprised at how much more savings is required to retire early. Many things contribute to this, such as your investment portfolio having less time to grow, leaving the workforce before you hit your peak salary years, and leaving the workforce when you’re still paying off major purchases like a mortgage or education. To support you until the end of your life expectancy, the goal number may be more than you would think. Before you’re eligible to take withdrawals from your 401(k) or receive Social Security, how you will support your cash flow needs?
For those who haven’t received a financial windfall, early retirement can be enhanced by living below your means during your earning years. If you are already practicing this strategy while money is coming in, you may be in a better place to continue living on less and making your money count when the income stops.
If you’re not receiving healthcare benefits, plan for managing those costs. This can be an important consideration if both you and your spouse are not working – especially if you still have children at home or potential health issues.
3. Transitional Retirement – In this scenario, you find people continuing to do the same job they’ve always done, but working less and less time. They may cut down to 3 days per week, then 1, before ultimately exiting the workplace for good. This is a good fit for people who enjoy their career but want less stress or time commitment.
Example #1: A physician who enjoys the work they do may cut back on hours so they can continue to help people at a less stressful pace. They may choose to time-share a job with another physician in the same scenario, or even with a physician acting as the main caregiving parent who wants a more flexible schedule.
Example #2: A business owner may find a successor to take over their firm but continue to work in the business. They could work as a consultant for the firm or continue on as a relationship builder that continues to work with clients rather than the day-to-day business operations.
Financial Considerations: This scenario requires you to understand what your work picture looks like in transition and how much you are earning. If you earn enough by continuing to work, consider not touching your “nest egg” so it can continue to grow while your income covers your daily expenses. You may not have to put as much or any additional money into savings because you’ve built your nest egg up to a level that can sustain you when the income stops, but allowing it to continue to grow by staying invested can increase your nest egg for eventual full retirement. Healthcare and benefits are important - review your contract to see which benefits will remain or be removed as you reduce your hours so you can plan to support any that you no longer have.
4. Working in Retirement – This scenario differs from a transitional retirement in that you may choose another job or part time job than you’ve previously had. It could be one that comes with less money and less stress (though that’s not always the case), but still allows you to remain active in the workforce.
Financial Considerations: As with transitional retirement, does this situation allow you to cover your expenses without touching your “nest egg?” Continuing to bring in income may allow you to reduce your investment withdrawal rate or even save more to prepare for full retirement down the road. If you are working in retirement due to a financial need, you may want to find a job that still has benefits and healthcare coverage to further lessen your financial burden.
5. Temporary Retirement/Sabbatical – This type of retirement can happen in many ways, such as making enough money to retire at a young age, spending your potentially healthiest and active years following a dream, and then returning to the workforce later in life. Or, it could mean taking smaller, frequent breaks during your working years by choice or to serve a need such as caring for a child or family member.
Financial Considerations: How will you stay valuable? Consider taking on training during these breaks so you are still highly trained and desirable when you re-enter the workforce. Finding a career that supports these sabbaticals could be valuable so you don’t have to reinvent yourself each time you take on a new job, though that challenge may appeal to some people.
You may have to live below your means during your working years to sustain yourself during non-working years. Disability insurance coverage may also be important because if you are injured while working, it may derail your plans to stop and start again if you don’t have the capabilities you had been counting on.
In each of these situations, it is important to factor in your life expectancy so you are always planning to meet your financial needs for as long as you live and prepare for the unexpected. Health problems, disability, downsizing of your company or the need to care for someone can all impact your best laid plans.
Your retirement does not have to look like everyone else’s to be successful. When you start to consider alternatives that you hadn’t realized were possible, you are met with greater flexibility for living the type of life that works best for you.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Originally published on March 7, 2017 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.