Retirement. It’s something everyone thinks about at some point in their lives. Leading up to retirement, one of the most frequent questions we get is, “Have I got all my bases covered?” This can be a tough question to answer. There are so many unknowns in retirement, and it can be hard and very nerve wracking to try to get your hands around everything.
At Foster Group, we help people retire all the time. Because our team of Advisors has walked hundreds of people through this transition, there is a collective wisdom that we tap into for every new retiree. In our experience, most clients value having that experienced voice to help them ford the river. We also know them and their unique situations and are focused on their overall well-being. We can help clients look at the big picture, as well as the day-to-day decisions, and ensure their plan is ready for this transition.
When I see or hear about the people who have retired most effectively, these three themes stick out to me:
1. They give themselves the gift of financial flexibility.
2. They practice ahead of time.
3. They know what they want retirement life to look like.
Let’s dive into these one at a time.
1. Give yourself the gift of financial flexibility.
As a backdrop, here’s a chart that outlines the tax impacts of various kinds of accounts. This isn’t exhaustive, but it has some of the most important account types for this purpose.
You could give yourself greater financial flexibility by actively building up all three of these buckets. In particular, building a brokerage account balance before retirement gives you options once you retire.
Here’s just one example of why this can be helpful. Let’s say that you’ve exclusively saved into your 401(k), so all your available dollars are fully taxable to you. That means that you’re already paying taxes on the money you withdraw to live on. Now, suppose that your car breaks down and you need a new one. If you don’t want to take on a car loan, you’ll need to withdraw a large sum from your 401k, say $40,000, to pay for that car. But because your dollars are fully taxable to you, you may actually have to withdraw $50,000 ($40,000 for the car and $10,000 to pay taxes) instead of just what you need for the car. However, if you have the funds to pay for the car in a brokerage account or Roth IRA, this withdrawal will be either minimally taxable or completely tax free.
Again, the goal here is to create financial flexibility when you need it most. As always, we encourage you to consult with your tax advisor for your specific tax situation.
2. Practice ahead of time.
As clients approach retirement, we commonly suggest that they practice living on their retirement budget. For some clients, we help them set this budget. For others, they come with a number in mind and ask if it fits within their plan. Either way, we ask people to try living on that number for six months. If the budget fits within their plan and feels comfortable after six months, that’s a great sign they can retire when they’re ready.
3. Know what you want retirement life to look like.
In a great way, the pace of retirement life is different. However, when people retire, they lose one of the main things they’ve channeled energy into for most of their lives. They also lose a lot of the social support they had through work.
As we’ve helped clients retire, we’ve seen that the people who have the best transitions into retirement are the ones who know how they’ll be spending some of their time. The specific activities may vary, travel, volunteering, and hobbies, to name a few – but it’s important that people have something to give them direction and a way to expend their energy. These activities also give them a new social circle, or expand their current circle, which gives more purpose to whatever activity they choose. Whatever the avenue, it’s important for people to feel purpose in this new phase of life.
Parting thoughts
Retirement is exciting, but it can also be very uncertain. Setting yourself up for success ahead of time can help mitigate some of that uncertainty and let you enjoy retirement to the fullest. After all, you’ve worked toward this goal for a long time; you deserve to enjoy it!