YOUNGSTOWN, Ohio – Wealth experts say preparing for retirement requires a plan that aligns finances and lifestyle while being realistic about income and expenses.
“Everything comes down to having a plan and staying on top of it,” Tim Petrey, CEO of HD Growth Partners in Liberty, Ohio, says. “Being able to financially retire means that you have a high degree of confidence in your annual cost of not just living but enjoying life.”
Petrey suggests once you know the range you need to retire, then work backwards to ensure you can accomplish your goals.
Brian Hostettler, senior vice president and senior relationship strategist at PNC Bank, says five years out is a good time to start focusing on aligning your finances and lifestyle.
What will your budget look like and what types of income will you still have during retirement.
“You should estimate your retirement expenses, housing, health care, hobbies versus expected income from pensions, Social Security, investments to find any gaps that may be there,” Hostettler says.
Dan Griffith, senior vice president and director of wealth strategy and wealth management at Huntington National Bank, says it is important to look to see if the financial house is in order. He says it’s important to consider feelings about your balance sheet and net worth, as well as what benefits you are going to lose when you retire and how much will it cost to replace them.
Additionally, Griffith says people may have to look at the recent performance of the market. Another good year, means you will be ready to retire financially, but if the market is down, that may mean working another year and a half. But unless you have a good grasp of your balance sheet, those questions are difficult to answer, Griffith says.
Bill Moss, vice president and senior investment officer at WesBanco, says the last two years of stock market growth has increased many people’s wealth more than they may have anticipated.
“Markets like that are rare,” Moss cautions. “They don’t tend to last indefinitely, but we are in the environment now where assets are probably at the highest level people have ever seen in their history. And the question is, if the market goes back to the normal and I need to withdraw 5% a year, what is that going to look like for me?”
Moss suggests it is important to challenge people to be realistic with their numbers. Going from a regular paycheck to Social Security and saved retirement funds, can mean covering debt and monthly expenses, while still maintaining a quality lifestyle with less. And healthcare costs will change.
“People act like the money keeps going or only goes down a little bit,” Moss says. “Get realistic [about] what the budget really looks like… because most people don’t want to sit at home seven days a week when they retire.”
Testing Your Plan
Hostettler says some people do a trial run of their desired retirement lifestyle, spending a couple of weeks or longer living on their retirement budget before they retire.
Griffith points out some people forget to think about those large future and annualized expenses. For instance, if the air conditioner is aging, what will it cost to replace it. Additionally, the small amounts you are spending that you are not aware of must be added to the budget.
Griffith also notes married couples need to be on the same page when making a retirement budget.
“We find what happens with folks who are retiring is there can be tension in the relationship, because maybe one person is willing to retire today and cut expenses by 30% and the other says ‘Hey, I’m retired. I want to spend. I want to go shopping every day and play golf every day and take 10 trips.’”
Petrey also suggests testing your plan to reach your estimated retirement savings as you save.
“A great adviser will run tests like Monte Carlo simulations to test thousands of different financial scenarios to determine our likelihood of the success of your plan,” he says.
Petrey also notes your plan has a better chance of success, the more detailed you are about those scenarios. For example, inflation, travel plans, college costs for the children and a cushion for retirement should all be factored into the planning.
“You’ve spent your whole life accumulating assets,” Petrey notes. “Being comfortable spending them down only happens if you’ve got an intentional, well thought out plan in place that you can monitor with your adviser on a regular basis.”
The Numbers
While most financial advisers have a similar goal of helping you accumulate as much wealth as possible, Petrey cautions you also need to be able to enjoy life before retirement. It’s important to find the right balance.
Five years out, Hostettler suggests looking at ways to maximize savings toward the near future. He also suggests considering shifting investment strategies, being less aggressive and moving toward capital preservation.
Five years before retirement could be a good time to look at the portfolio and at tax strategies that can be implemented in making decisions about which investments to access first in retirement and which ones to hold onto, Hostettler says.
“I believe individuals can be more comfortable and ready to retire when they have thought through and have a plan in place for how that’s going to look and how they’re going to transition into that retirement phase,” Hostettler says.
When it comes to healthcare, those planning to retire should begin researching the costs for Medicare, the supplemental and Advantage plans, long term care insurance, dental and vision, Hostettler says.
Beyond the Numbers
“Beyond the financial side of things, retirement is a really interesting psychological exercise,” Petrey says. “It’s not easy for everyone, especially high performers.”
Finding something to do in retirement to give you a purpose can be important, Petrey notes, even if it is learning a new skill like playing the piano, improving your golf game or focusing on your health or your family.
Griffith says many people fail to look at whether they are emotionally and mentally prepared for retirement.
“You can adjust the trip you go on, or maybe the market is going to be up or down a little bit, but emotional preparedness, that’s something that only you can do,” Griffith says, adding he asks clients to consider. “What does it actually look like?”
Griffith also says retirement now means something different that it did when our grandparents worked in a factory and got a watch and pension in the end.
“Today for many people, retirement is a spectrum,” Griffith says. “We may have seasons in life where we’re spending a lot of time working, but a lot of people have generated expertise and talent that they’re still able to utilize and that talent and expertise is very valuable.”
Instead of working fulltime, Griffith suggests people consider consulting work, teaching or mentoring others. Even if it is only a few hours a week and does not bring in a lot of money, if it covers an expense such as health care or allows someone to continue to contribute into qualified plans, that can make a difference in their retirement budget. Griffith suggests that is a good alternative for someone in their 50’s, 60’s and even early 70’s, who is maybe not emotionally ready to retire.
“When we think about retirement or a happy life there are three things to consider,” Griffith says. “You need someone to love, something to do and something to look forward to.”
Moss says many people put off things on the bucket list for 20 or 30 years, intending to do them when they have enough money and when they retire. But that first class trip to Italy or boat versus the Kindle with a backlog of 400 books someone intends to read, add up to different budgets.
“Let’s really look at don’t just muddle through retirement,” Moss says of wealth management. “If you’re really looking for that one big item, let’s really talk about that and let’s plan on getting you there.”
Financial Adviser
After 59 and a half, IRAs and other employee sponsored plans usually allow you to take money out without penalty, says Griffith. Additionally, those in their mid-70s are required to begin taking minimum distributions from qualified retirement plans.
Petrey notes the importance of having tax deferred assets, non-tax deferred brokerage accounts and cash/savings to manage the tax impact of money pulled from different sources.
“Doing this over an extended period of time will make your money last much longer,” Petrey says.
A good financial adviser can be helpful in figuring all of the requirements and helping someone make sure their retirement is financially realistic. A team of advisers can question if you have thought everything through and make sure you do not feel alone through the process, Griffith says.
Moss suggests a retirement plan should mean keeping money in different buckets such as having a year’s expenses in the checking account perhaps to save it from fluctuations in the market or to cover inflationary periods. Additionally, annuities can mean a stable stream of income but have lock up provisions and penalties if taken early. The market, stocks and bonds can be more liquid. And there are tax implications in some accounts like IRAs versus pretax Roth IRAs.
Moss says working with a financial adviser to create a plan five, three or a year before retirement can help alleviate those issues.
“Hey are we maximizing everywhere we can get from and are we avoiding all those penalties,” Moss questions.
Moss notes some companies had significant employee stock purchasing plans, but accessing the cash can mean higher taxes.
“Let’s really look during those years heading into retirement and consider if we’re going to take some gains and pay taxes this year, as opposed to waiting till retirement when the other things kick in,” he says.
Even if you don’t think you have saved enough, Moss says sitting down with a financial planner is better than burying your head in the sand. A financial planner can help maximize what you have saved.
“Find a good young CPA and financial adviser that’s going to be by your side, coaching you through your journey,” Petrey says.
