By Christine Waldschmidt, JD, Trust Advisor
The WHO is You, and the WHAT is Retirement. The rest of these queries take a little more digging.
If you are thinking about retirement, the first important question to ask yourself is, “Why?” The decision to leave the workforce is a life-altering one and should not be made lightly or on impulse. Digging into your motivation may uncover that your real issue is dissatisfaction with your current job rather than a true desire to transition out of the workplace completely. If this is the case, dig a little deeper; is your dissatisfaction with the type of work you are doing, or the environment in which you are doing it? If you love the work but hate your job, perhaps you need to look at switching companies. If the work has ceased to interest you, is there a different field or line of work that you’d like to explore?
Particularly in middle age, it is not uncommon for people to experience dissatisfaction. A recent study of 132 countries conducted by the National Bureau of Economic Research shows a happiness curve that reaches its lowest point at age 47.2 in developed nations.1 It gradually rises again in the mid-60s, but that doesn’t mean your powerless to improve your dissatisfaction. It is important to self-reflect, and try to identify the true source. Retirement may or may not be the answer. It is never too late to retrain, and once children are grown and requiring less time and attention, there may be an opportunity to take night classes or pursue other course work that would open other doors. Many employers offer tuition assistance that can support this effort, and further study may lead to new and interesting career opportunities.
It isn’t just about what you are retiring from. You may know that you want to leave the workforce, but do you know what you want your days to look like? Whether it is donating time to charitable organizations you care about, freeing up time for hobbies or travel, a desire to spend more time with loved ones, or some combination of the above, make sure you understand what you are retiring to.
Most jobs dictate where we live, and whether or not we move around or stay put. Retirement puts you back in control; you can decide where you want to live based on your personal rationales and desires, not the dictates of a job. In retirement you have the freedom to move to enjoy a more desirable climate, live in a state with no income tax, be closer to grandchildren, explore new places, or start whatever new adventure your heart desires. Do you want to downsize to a maintenance-free condo, or buy an RV and see the country? Think about where you see yourself, and work through this with those close to you to figure out what makes sense.
The answer to this question is important because it will impact the When and the How. The geographical location and style of home you want, as well as the amount and nature of travel you plan on, will significantly impact the amount of retirement assets and income you will need.
Answering this question can be a tricky balancing act, and it must be answered in light of, and in spite of, the uncertainty of life expectancy and investment returns. Mahatma Gandhi famously said, “Live as if you were to die tomorrow. Learn as if you were to live forever.” I would build on this excellent advice and suggest that you also Plan as if you were to live for a very long time. The reality is that life expectancies have increased dramatically over the past century, and many people will live into their nineties and beyond.
Determining the timing of retirement requires careful consideration of many factors:
Whether you are dealing with a life-shortening medical prognosis, neurological failings, deteriorating joints, or the lucky circumstance of having no major health concerns, your physical issues will necessarily inform the timing of your retirement. You can’t take it with you, and we all want to be able to enjoy the fruits of our labor when we can still actually enjoy things.
Cost of health care
If you depend on an employer-sponsored plan for health coverage, this can be a significant financial consideration. According to healthcare.gov, the cost of a Silver plan (that’s the middle-of-the-road plan, better than catastrophic or Bronze, not as good as Gold or Platinum) for a 60-year-old non-smoking male in Johnson County, Kansas is $1,095 per month with an average out-of-pocket maximum of $7,810. That’s up to $20,950 annually in healthcare costs you need to plan for. Medicare is not available until age 65, and even then, you will need to consider the cost of supplemental insurance and prescription coverage. And remember, you still have to plan for non-covered expenses like vision and dental care.
Accumulation of retirement assets
This is simple math; the longer you work, the more income you make, and the greater opportunity you have to contribute to a qualified retirement account.
The amount of your Social Security benefit payment is based on your lifetime earnings, so the longer you work, the higher your benefit will be. You can choose to draw on it as early as age 62, take it at your normal retirement age (65-67, depending on when you were born), or wait as long as age 70 to receive the maximum benefit. The sooner you take it, the smaller the monthly benefit payment will be, and the difference can be significant.
You have to weigh and balance the components of your personal quality of life equation. Early retirement without enough money may be a misery and working until you die at your desk may not be the best reward for your labors.
AND FINALLY, (DRUMROLL PLEASE…) HOW?
When you are ready to retire and have a good life plan in place (you’ve answered the Why, Where, and When), the How will involve getting your retirement assets organized, invested appropriately, and deciding which available retirement assets to spend first. These can be complicated questions, with the best answers dependent on your unique circumstances. This is where the working with an expert becomes critical. Be prepared to address the following questions:
Rollover or not?
When you retire, you typically have the option to leave assets in a Qualified Retirement Plan (401(k), 403(b), etc.) or roll the assets over to an Individual Retirement Account (IRA). You need to look at fees, investment options, flexibility, and convenience to determine the best choice.
Timing of Social Security
As discussed earlier, there are trade-offs to taking your Social Security benefits sooner versus later.
If you are married and a beneficiary of a Defined Benefit Plan, there is often a choice between a lifetime benefit versus a joint spousal lifetime benefit (more money for your life, or a smaller amount that will pay out for the duration of both lives).
You need to determine the asset allocation that makes sense for you and factor in tax environments of different accounts (taxable versus tax deferred IRA versus Roth).
Which assets to tap first?
You need to look at the tax consequences of pulling money from the various pots. The traditional rule is to tap your after-tax brokerage assets first, Traditional IRA and 401(k) assets next, and save the tax-free Roth assets for last. But depending on the specific assets in each account, and personal situations that may cause changes in your marginal tax rate, this needs to be reevaluated and monitored on an annual basis.
These are not easy calculations to make, and it is always a good idea to have a circle of trusted advisors who can help answer questions and navigate these sometimes choppy waters. The Private Wealth team at First Business Bank can review your estate plan, craft a strong financial plan, and help you manage your retirement assets. We are here to help you build your dreams and protect your future.
Retirement is too important to leave to chance. Reach out to us today to plan your own retirement strategy based on your own goals and individual situation.CONTACT US