3 Critical Steps to Take Before You Retire

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It may not feel like it, but the day will likely come when you retire. While a fulfilling retirement has different meanings to different people, there are a few important steps to take before finalizing your exit from the workforce and reduce your retirement worries.

The majority of Americans say retirement is their top financial concern. According to a recent poll from Gallup, 59 percent of people say they are moderately or very worried about not having enough money for retirement, which is down significantly from 67 percent just two years earlier. The next top concern, not being able to pay medical costs, worries 53 percent of Americans. However, many people overcome these obstacles.

Gallup also finds that the average age at which U.S. retirees actually retire is 62. That is up slightly from recent years when the average age hovered around 60, but Americans are retiring earlier than expected. In fact, Americans didn’t anticipate on retiring until 66 years old.

Let’s take a look at three critical steps you should take before taking the plunge into retirement.

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1. Finances

Hopefully you’ve been saving and investing for retirement over many years, if not decades. Now it’s time to estimate how your income and expenses will look in your golden years. Start with mapping out the monthly expenses, but don’t forget about big ticket items such as trips, home renovations, cars, and any financial assistance you plan to give family members.

“Starting taking an accounting of your monthly expenses and see what they really look like,” said Mike Mussio, CFP, CFA, Managing Director of FBB Capital, in a phone interview. “Our average client is probably an above-average saver, but there’s anxiety from no longer putting money into the pot. In fact, clients will have to turn on the spigot to start bleeding some money out of the pot. To mitigate that, we try to show as accurately as we can, a comparison of current expenses and income versus projected expenses and income in retirement. If we do a good job with that and there are no major gaps with under saving, that tends to alleviate that anxiety at least somewhat.”

There are always unexpected expenses in life, but keep in mind that your retirement spending habits may not decrease significantly. In a recent report from JP Morgan, the average spending for 65- to 74-year-olds totaled $44,886 per year. Meanwhile, health care costs rose throughout retirement.

Photo Courtesy of Familymwr, licensed through Flickr via Creative Commons

2. Emotions

Money sure does help the retirement process, but it’s not the only thing to consider. You should also think about how you will spend your newfound time. Mussio explained, “People need to give some serious consideration to how they spend their time in retirement, whether it’s volunteering, part-time work, more travel, or just relearning how to cohabitate with a spouse.”

“We tell clients it takes a good six months to a year to figure out what their new normal is going to be, both financially and emotionally. I think the allure of being retired has a nice ring to it for most people, but for a lot of people there’s a period of adjustment. The change in routine and identity can have a bit of a negative effect. It’s best to have a plan of how you’re going to occupy your time, identify things you’re passionate about or things you’ve always wanted to do, and how you plan to pay for those things.”

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3. Blind spots

Nobody cares about your money as much as you do, but another perspective may help you identify blind spots in your retirement plans. As with most aspects of retirement, you should start sooner rather than later.

“There’s a lot of tools and great resources online. You should utilize those resources, but I also tell people it doesn’t hurt to have a conversation with someone who does this everyday and might be able to identify some blind spots, such as estate planning, accurate inflation projections, or risk management strategies,” explained Mussio. “Those conversations are most effective not a week or months before you pull the plug on the workforce, but a few years ahead of time. When you’re three to five years out from retirement you can still affect your balance sheet by adjusting your saving structure. You can also put a plan together and attach a timeline so all the blind spots have been seen.”

In an earlier article, we discussed how the retirement crisis in America is not contained to any one generation. “Experts have long written about the changing retirement landscape over the past century,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies. “Times are changing so rapidly that the retirements of Baby Boomers, Generation X, and Millennials will not only be a radical departure from their parents’ generations but from each other as well.”

Let’s recap from our earlier article on the current state of affairs for the three major generations:


1. Baby boomers, born 1946-1964

Baby boomers are the least confident generation when it comes to retirement. Only 14 percent of respondents said they are very confident, and 41 percent believe their standard of living will decrease, the worst percentage among all generations. Many baby boomers were already well into their working careers when the retirement landscape changed from defined benefit plans to 401(k) or similar plans.They did not experience the full effects of long-term compounding interest and have total household retirement savings of $127,000 (median). In fact, 65 percent plan to work past age 65 or do not plan to retire at all.

“The best of intentions to continue working and fully retire at an older age can be easily derailed with a lack of planning,” said Collinson. “Baby Boomers are not being sufficiently proactive about taking important steps to help ensure that they continue working beyond 65 or have a Plan B if retirement happens unexpectedly. Baby Boomers who are envisioning a transition into retirement that involves working should do a reality check whether their current employers will support them. If not, they’ll need to seek employment elsewhere or pursue something entrepreneurial. All of these scenarios require being proactive and strategic.”

2. Generation X, born 1965-1978

Generation X entered the workforce in the 1980s and is the first generation to have access to 401(k) plans for most of their working careers. They started saving for retirement at a median age of 27. More than half expect to self-fund their retirement with 401(k) or similar plans. However, Generation X has been more likely than other generations to rely on 401(k) loans and early withdrawals.

Generation X workers estimate that they will need to save $1 million (median) to retire with a comfortable lifestyle, which reveals a profound gap compared to what they have saved to date. Total household retirement savings for generation X is only $70,000. That is up from $32,000 in 2007, but time is of the essence.

Collinson said: “Generation X will begin turning 50 next year, a loud wakeup call for them to get laser-focused on planning, saving, and investing for retirement. Their clock is ticking but they still have time to substantially improve their retirement prospects. The future is now.”

3. Millennials, born after 1978

Known as the digital generation, millennials are the least affected by the Great Recession, and consequentially are the most confident about their futures. In fact, 17 percent say they have fully recovered, and 21 percent were not impacted at all. One in five are very confident that they will be able to live a comfortable lifestyle in retirement. Meanwhile, 60 percent expect to retire before age 65.

Technology is also helping millennials with their personal finances. According to the study, 71 percent say mobile apps to manage their accounts are helpful, compared to only 49 percent of baby boomers. Furthermore, 68 percent say mobile apps from their plan providers, including tools and calculators, are beneficial.

“Millennials are a digital do-it-yourself generation of super savers,” said Collinson. “They’ve heard and responded to the message they need to start early and save as much as possible. Millennials take their retirement benefits very seriously.” The survey found that 70 percent of millennials are already saving for retirement, starting at an unprecedented age of 22 (median).

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