Everyone wants to retire with money in the bank to do whatever they want to do when they wind down from the work grind. Sounds good, right? But how many of us are really ready to retire, let alone at the current life style we have today? Unfortunately, not very many. This is an area that is often misunderstood and underestimated by most people. They don’t fully realize what it means to retire and what it takes to retire…at least the way they want to retire.
Understanding the basics of retirement and what it takes can give you much greater peace of mind before you retire and aren’t surprised during retirement. Many seniors “come out of retirement” not because they have burning desire to work but because they have to do something to supplement their income. This is often a shock and surprise to them…either because they underestimated or they didn’t underst and what it might take.
People getting ready to retire really want to be reassured that they did a good job and were good stewards of their money, according to Investopedia’s article “Determining If You’re Prepared for Retirement.” They also want confirmation that the retirement assets they’ve built over a lifetime will last for the rest of their lives and that they’ll be able to live in comfort.
Before you retire you should have a whole list of questions to ask your attorney, financial advisor, and accountant. Some of the most commonly asked questions are…
- Am I saving enough, or did I save enough?
- Can I retire, or did I make a mistake and retire too early?
- Were my investment decisions the right ones?
- How am I doing, compared to my peers?
The answers to these questions are very important to anyone retiring. Unfortunately, there is no “one-size-fits-all” answer. Just because you’ve accumulated six, seven or even eight figure retirement savings doesn’t mean you’ve “won” the retirement game and are ready to retire without any issues. It becomes a balancing act of matching what you have to your outflow of funds. You can have a $10 million estate built up but if you have a $15 million outflow lifestyle you are still in trouble. More is not always the answer, managing within what you have is the strategy that wins in retirement.
Perhaps the most important factor to a successful retirement is your income to expense ratio. Can you generate enough income from all sources without drawing down too much from your portfolio? If you withdraw all the funds that generate funds you will run out of money quicker than you think.
If you have a small to non-existent portfolio but a good-sized pension, maybe you don’t need such a big portfolio. If you live very simply, it’s possible that Social Security benefits and modest withdrawals from your investments might take care of your needs. It’s all a balancing act to determine whether or not you can retire effectively and with the lifestyle you want to have.
Just because you have a large portfolio doesn’t mean you don’t risk running out of money during retirement. If you spend lavishly on first-class vacations, drive luxury cars and live in a house that costs a fortune to run, you can easily get yourself into a tight spot and find yourself out of money quickly.
It’s critically important to look at all your sources of income to determine how long your portfolio will last. You should include Social Security, pensions, retirement accounts, rental property, and any other sources of income. It is important to figure out how much income you’ll need on annual and monthly basis. You’ll then have a better sense of whether you are prepared for retirement.
It is also equally important to have an effective estate plan in place as you enter into your retirement years. A will, power of attorney, healthcare directive and other documents will help protect you and your loved ones. And the size of your portfolio doesn’t affect whether or not you should have an estate plan…they aren’t correlated. Even the smallest of estates should have their wishes documented and what they want to have happen in their later years.