In my experience as a retirement planner, I have found that very few people enter retirement completely prepared for what is ahead of them.
In addition to all the financial aspects of life without a paycheck, people planning for retirement rarely have any idea of how they will spend their extra time, and often fail to see some of the risks that could impact their retirement down the road.
If you are preparing for retirement, you should ask yourself a handful of questions to help you envision what to expect and create a plan to live your dream retirement.
Below is a list of 6 questions I think people preparing for retirement should answer to point themselves towards a retirement with less anxiety and more clarity. This is by no means a comprehensive list, but as I meet with more and more future retirees, I find these 6 questions to be very helpful:
How much will I need to spend during retirement?
Many people have no idea how much they will actually need to spend in retirement to maintain their current lifestyle. I would start honing in on that number years before retirement.
People often anchor their retirement spending expectations to their current income, but since taxes and usually savings are taken out of that paycheck before they ever spend a dollar, it actually takes less to replace their current spending than they might imagine.
I think a good starting point is to come up with a reasonable estimate of your current spending. By the time you get your paycheck and save, what amount are you spending each month.
It can be fairly simple math - if you know you get a $3,000 monthly check after taxes are taken out of it and you save another $500, you know you are spending around $2,500 a month and that is approximately how much you will need to maintain your lifestyle in retirement.
You should also factor in that certain expenses will go away during retirement, such as extra gas expense from a commute. I’d recommend tracking your expenses on an app such as mint.com to start seeing where you’ll keep spending your money after retirement vs. which expenses may go away once you stop working.
If I could wave a magic wand, what would my retirement look like?
You’d think this would be the easiest to answer, but people who walk in our door usually have a tough time answering this question because they’ve never really thought about it.
Think about what you’d like to accomplish in retirement. What lifestyle do you want to live? What do you want to spend your time and money on? How are you going to use your money on the things that are most important to you?
Don’t be afraid to think big because often you can make some of those dreams come true. We often hear clients say things along the lines of, “well I’d love to do ______, but I know it’s too expensive,” or “we could never do that!” when talking about goals that could be very meaningful to them but have always felt out of reach.
These people have usually been conditioned by a lifetime of frugality and saving, and are usually surprised at some of the things they can achieve. They are often rewarded beyond their expectations.
What will I do in my free time?
This may sound simple, but this is an important one. Retirees tend to watch around 50 hours of TV per week. If that’s your dream retirement than by all means, go ahead and live out your dream, but for most, this retirement may be lacking the purpose and productivity required for a happy retirement.
I would recommend planning out trips, projects, and hobbies that will not only keep you busy but will also keep you interested, engaged and happy. Especially in the front end of retirement, when you are capable of doing a lot more than on the back end.
This is a liberating time in your life where you aren’t tied down by a job or other obligations, so this is the time to do a lot the stuff you said you would do but never did because you were too busy.
Read more: How Will You Spend Your Retirement?
Are there any “financial boulders” rolling down the hill at me?
This is an important one because when determining a sustainable withdrawal rate (how much you can withdrawal from your portfolio responsibly) it is important to include all withdrawals throughout retirement, including lump sums. You wouldn’t want to leave something out and have it crush your retirement plan.
Whether it’s a child who needs a little extra help here and there or a mother or father that will need her nursing home expenses covered as she or he ages, these are important items to factor into your spending plan.
It is important to sit down and ask yourself, are there any looming expenses that could show up throughout retirement and derail my financial plans?
What does not working mean to me?
Many people quit cold turkey – approaching retirement with an attitude of “I’m out, and I’ll never work another day in my life!”
However, for some, it just means transitioning to part-time in the same field or finding something completely different that they enjoy and are passionate about. This is becoming more and more common, and in addition to financial benefits can often give people purpose and keep them engaged, which benefits them mentally and physically.
It isn’t an all or nothing thing, and I think it’s important to realize the different forms of retirement that are becoming more and more common every day.
What trade-offs should I make to achieve my optimal retirement?
Each phase of retirement comes with a lot of decisions.
When do I retire? How much should I spend? When do I claim social security? Should I leave a legacy? Do I self-fund long-term care insurance? Can I donate to my favorite charity? When do I buy my next car? The list could go on and on.
This is where trade-off’s come into play. If you know how much you need to make your world work, then you’ll be able to hone in on when, how, and what you will be able to do in retirement from a financial standpoint.
When you build a comprehensive plan, it provides you with the ability to run “what-if” scenarios to formulate your optimal retirement. This is when you answer questions like: “if I work a couple extra years, how much more can I spend in retirement?” This allows you to make an informed choice given the tradeoffs between the two.
Each piece of the plan, whether its retirement age, asset allocation, or any other, is like a lever that can be pushed or pulled one way or the other and it will ultimately affect your overall plan.
Many don’t even know these levers are there affecting the plan at all. So it’s important to be aware of the different options you have in retirement.
This continues to be important throughout retirement because as the markets change and your life inevitably evolves over time, many options will be revisited year by year.
These 6 questions are just a starting point
These six questions are not supposed to fully prepare you for retirement; they are supposed to provoke thoughts and ideas about retirement, to make you more aware of some of the issues you may face and things you should consider in advance.
It is important to think not just about the financial aspects of retirement and maintaining your current lifestyle, but also the personal aspects of retirement like how you are going to spend your time to live a life full of purpose. It is also important to think ahead about risks that could cause problems throughout retirement, whether they be financial or personal.
Answering these question is only a starting point when thinking about retirement. With some general ideas of what your dream retirement would be, you can start making a comprehensive retirement plan and take steps to make it a reality!
By Daniel Ruedi, CFP®, RICP®