Are you prepared to retire?

John Spoto

The decision to retire is life-changing. As exciting as it is to start a new chapter, this decision also involves making difficult tradeoffs, some of which are irreversible and have uncertain consequences. It’s understandable that for many people, the process is fraught with emotion and anxiety. Making an informed decision means tackling financial, social and psychological issues in a clear-eyed, pragmatic way. Most of the research on retirement outcomes has shown that even some basic, common-sense planning can have a significant impact on a retiree’s preparedness and quality of life.

Can you afford to retire? Historically, the concept of retirement readiness has been framed as a purely financial decision. Not surprisingly, most of the studies on this topic have been commissioned by financial institutions. From the time we enter the workforce, we are barraged with different variations of the same advice: Work hard, plan well and save aggressively so you can retire comfortably and securely. The underlying assumption is that once individuals determine they have accumulated enough savings, they will exit the workforce. In fact, the evidence supports the idea that economic factors weigh heavily in the retirement decision calculus. Sufficient accumulated retirement savings and income to support expected retirement expenses encourage workers to retire, whereas inadequate financial resources persuade them to continue working.

Certainly, without sufficient assets and income to support a desired lifestyle, money issues can become a major source of stress. It’s tough to envision a satisfying retirement when insufficient finances limit your ability to support the activities you enjoy, or worse, fail to provide the necessary safety net at a stage of life when your ability to generate income will be at best, limited.

To avoid this, start by establishing a clear picture of your financial situation. The fundamental aspect of a financially secure retirement has less to do with investments or taxes (the areas that seem to garner the greatest interest and attention from people), but rather ensuring that your spending is in line with your income (Social Security, pension, etc.) and savings. If it isn’t—and a lesser lifestyle isn’t appealing to you—you’ll need to work longer.

When planning for expenses, be realistic and remember to include a “reserve” for replacement costs for automobiles, home appliances, major home repairs, uninsured healthcare costs, unexpected emergencies and the effects of inflation. Also, maintain enough flexibility in your spending so if the financial markets tumble and drag a portion of your investments down, you can reduce spending if necessary, until your portfolio recovers. Taking these basic, common sense steps will help minimize the chances of inflicting permanent damage to your financial plan and running out of money late in retirement when you are unable to do anything about it.

While financial security is an essential requirement for most people contemplating retirement, it is only part of the story. Psychologists, gerontologists and most importantly, retirees are finding non-economic factors play a key role in making for a smooth transition into and a positive and satisfying experience during retirement. In the next article, we will discuss those.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions. John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com

||||

This Week's Circulars