I plan to retire in five years, but want to be sure I’ll be prepared. What practical guidance can you offer me?–A.M.
It’s good to see that you’re thinking ahead about making the transition to your post-career life. Many people have an idea of when they’d like to retire, whether it’s a certain age (65, on average, according to the Employee Benefit Research Institute’s 2017 Retirement Confidence Survey) or just a sense of how much longer they can stick it out on the job. But too often that idea is just that — an idea that has nothing to do with the reality of whether they’ll actually be able to pull it off on their preferred schedule.
Which is why it’s important that in the five to 10 years leading to your hoped-for exit date you determine whether that timing is realistic and, if not, revise your plan.
Answering these four questions that can help you do that:
1. Will you be able to maintain your standard of living when the paychecks stop?
The key issue here is whether the resources you’ll have available when you finally call it a career — your retirement savings, plus whatever you’ll collect from Social Security and any pensions — will be able to generate sufficient income to cover your living expenses throughout a retirement that could very well last 30 or more years.
There’s no way to know this with 100% certainty, but you can get a decent idea by going to a tool like T. Rowe Price’s Retirement Income Calculator. It will estimate the probability that withdrawals from your savings plus Social Security payments and any other guaranteed income will be able to support that level of spending throughout retirement.
I’d say you want to see a success rate of at least an 80% or so for your planned exit date to be doable. If your estimated rate of success comes in lower than that, you can see how making adjustments, such as saving more, cutting your anticipated spending or even retiring a bit later than you’d planned can improve your chances of success.
In any case, by running a variety of scenarios with this calculator — or hiring a financial planner to do a similar analysis if you’re not confident about doing it on your own — you can see whether your planned retirement date is achievable and, if not, what might be a more attainable plan.
2. Are your investments in order?
As you get toward the end of your career, you typically want to begin shifting toward a more conservative blend of stocks and bonds. The rationale for doing this is to avoid getting whacked with a big loss on the verge of retirement.
To get a sense of what stocks-bonds mix is right for you now, you can go to Vanguard’s risk tolerance-asset allocation questionnaire. The tool will recommend a specific mix of stocks and bonds and show you how that mix has performed in a variety of market conditions in the past.
You can then repeat this process every year or so as you near and enter retirement and then make adjustments to your mix, as necessary. There’s no single correct stock-bonds ratio that’s right for all people nearing or in retirement. But by the time they’re ready to retire, many people prefer to limit their stock holdings to 40% to 60% of their portfolio, enough to provide long-term growth while also affording at least a bit of downside protection.
The point, though, is that you don’t want to go into the home stretch to retirement with an asset mix that’s so aggressive your portfolio could suffer losses that may take several years to recover from — or a stocks-bonds allocation that’s so wimpy it has little chance of generating the returns you’ll need to maintain your purchasing power over a long retirement.
3. Have you thought about how you’ll actually live once you’re retired?
Chances are you’ll be spending several decades in retirement. So you want this phase of your life to be rewarding and meaningful, not just a period of marking time. The way to help ensure that is to engage in a little “lifestyle planning” before you retire.
The goal in this type of planning is to put some thought into how you’ll actually spend your time in retirement once you no longer have a 9-to-5 job to give structure to your days. Among the questions you might ask yourself: Will you stay close to home or do a lot of traveling? Do you plan to take on a part-time job in retirement, get involved in some philanthropic work or perhaps devote some time to a hobby or personal project (writing a book, tracing your family history, whatever)? Have you considered how you’ll stay socially engaged once you’ll no longer have the daily interaction with colleagues at work?
The issue of how you’ll live also has financial implications. An active lifestyle that includes lots of travel and entertaining will likely require a larger nest egg. On the other hand, deciding to downsize to a smaller home or relocate to an area with lower living costs could have the opposite effect by lowering your living expenses, reducing required withdrawals from savings and thus allowing you to get by with a somewhat smaller retirement stash.
Which is why it’s a good idea to factor the potential costs of various lifestyle decisions into the scenarios you run with the retirement income calculator I mentioned above. Indeed, by using a retirement budget worksheet like this one from BlackRock, you can even estimate your living expenses for a variety of different lifestyles (staying in your current home vs. relocating, lots of travel vs. minimal travel, etc.) and then see how your chances of being able to retire on schedule change depending on the lifestyle you choose.
4. Do you have a back-up plan?
We all know that, despite our best planning efforts, sometimes things don’t work out the way we hoped. A severe bear market on the eve of your planned retirement could render your nest egg incapable of generating the income you need to retire. Unexpected medical expenses might prevent you from saving as much as you need in the final stretch of your career to build an adequate nest egg.
For that matter, your whole premise of leaving your job in five years could be upended. Research from the Employee Benefit Research Institute shows that nearly half of workers leave their jobs earlier than planned, often because of a health problem, layoffs at their company or because they’ve got to care for a spouse or other family member.
So by all means do all you can to improve your chances of retiring on schedule, but consider what you might do if something goes awry. If you reach your preferred exit date but you still lack the resources to call it a career, then staying on the job a few more years to fatten up your nest egg may be the best call.
If, on the other hand, you find yourself out of work before your expected retirement date, you might have to resort to some combination of finding a new job and delaying retirement. Or you might decide to retire earlier than you wished but supplement your retirement income with part-time work or by scaling back your retirement lifestyle a bit.
In short, you might revise your plan any number of ways. But what you don’t want to do is set your sights on a future retirement date and then just sit back and assume that everything will all work out the way you want.
