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5 Considerations for a Smooth Transition into Retirement

After being in the workforce for decades, the thought of transitioning into retirement can be stressful. While most relish the thought of having more time to enjoy grandkids, travel, and pursue their own interests, in many cases one thing is still lacking. Peace of Mind.

Nagging thoughts creep in. Will I have enough money to enjoy my retirement? Will I outlive my money? Will I be able to afford good health care coverage? Do I have enough to pay for end of life care if that is necessary?

These questions and more rob you of the confidence and peace of mind you seek as you consider retirement. Careful consideration of the following five items can help.

  1. How much does my household spend annually today and will this realistically change in retirement?

Tracking household expenditures is never fun. But, getting a handle on how much money you are spending now is an essential starting point when contemplating retirement. Next, will this level of spending change in retirement? For instance, if you have a dependent that will be “off the payroll” in a few years, your spending should decrease in retirement. Or conversely, some retirees actually increase their spending in the first 5 years of retirement on such items as long-awaited vacations, new hobbies, etc. Modeling out your current spending and anticipating how this spending may change in retirement can establish the baseline of income you desire in retirement.

  1. What income sources will I have in retirement?

In order to determine if you will have enough money, you must determine your income sources in retirement. Most will have Social Security benefits, but this income source alone is not enough to provide for a comfortable retirement. Many will have investable assets such as 401(k) accounts, IRAs, and/or taxable investments from which they can pull. Fewer yet may have defined pension plans (teachers, for example) that provide guaranteed monthly income.

  1. Which income sources are guaranteed and which are subject to financial market volatility?

The more guaranteed income sources you have, such as Social Security and defined benefit pension plan payouts, generally the more secure your retirement becomes, as you are less exposed to the fluctuations of the financial markets to deliver your retirement income. The less guaranteed income sources you have, the more investable assets you need to provide the necessary cushion to protect you against financial market volatility.

  1. How much can I pull from my retirement savings?

While there is no “magical” number to use when modeling withdrawal rates from a portfolio, 4% can be a good starting point. If 4% of your retirement savings (401(k)s, brokerage accounts) plus your guaranteed income sources is near your annual household expense need, you may be close to your retirement goal. If you need to pull 7% per year from your savings to meet your retirement expense estimate, then you probably aren’t ready to retire just yet. Conversely, if you can comfortably meet your retirement expense need with a 2% withdrawal rate, you are most likely in very good shape.

  1. Am I mentally and emotionally ready to retire?

Often times the sole focus when considering retirement is on the quantitative aspect. Do I have enough money? While this is certainly important, qualitative factors should also be carefully considered. Just because you can retire doesn’t mean you should. For instance, do I have hobbies or pursuits that will keep my mind active in retirement? Is my social network centered around work? If so, how will I handle the loss of this interaction? Do I still enjoy and find fulfillment in my work? How will my relationship change with my spouse when we have more free time together? Be careful on that last one! These are all important considerations when contemplating retirement.

Planning for transition into retirement can be daunting. No list simple list, no matter how well constructed, can replace a thorough evaluation of your unique situation as you prepare to take this next step. Contact Melissa Ballard, Director of Financial Planning Services at PYA Waltman Capital, to schedule an initial consultation today.