On a daily basis, I read a lot of financial information. I like to stay informed, aware, and proactive. Yesterday, I read about a 35-year old couple that retired early with a net worth of $870,000. That same day, the results of a survey came out that just made me livid and you could say both inspired this article.
Now, I’ve got nothing against anybody leading their own life. Last time I checked this is still America. But I’ve currently got $875,000 in retirement funds, a great pension, and 35-years of funding social security waiting for me at 70-years old. And I still worry if I’ll have enough when I retire at 62 with ~$1.2M of investable assets (not net worth like this 35-year old couple).
The article didn’t mention anything about a new business venture or side hustle or near-term inheritance for this young couple. They didn’t address how they were dealing with health care costs or housing. There were just way too many unknowns not addressed in the article that it kind of pissed me off. With inflation and interest rates rising and many other global economic issues in front of us, what makes this couple think now is the best time to retire?
All I’m asking is for people to make informed decisions that are logical and not driven by emotion or desire. I’m not going to go into why this couple shouldn’t retire. Heck, just using the 4% rule (though they should use the 2.5%-3% rule) they will have $35,000 annually to spend. With inflation and many unknowns ahead of them, there are way too many variables to logically retire. Enough said on my part and I wish them well.
Let’s touch on some other things that makes it clear people are either wearing rose colored glasses or they have their head in the sand.
Social Security
A recent survey was done on people 26-years and older regarding social security. The survey found that 42% of respondents plan on filing for Social Security benefits early while continuing to work, up from 36% who said the same in 2021. Meanwhile, 39% of baby boomers who are not receiving Social Security plan to start before their full retirement age.
“Only 13% of survey respondents correctly identified their full retirement age where they will be eligible to receive 100% of their benefits.”
But here’s the kicker and the thing that really got me hostile. Only 13% of survey respondents correctly identified their full retirement age where they will be eligible to receive 100% of their benefits. Full retirement age is either 66 or 67 depending on your age but only 13% knew that. So, people are making decisions with what is likely their most important retirement benefit and they don’t even know when they can receive full benefits. That is horrible and just sickening … there is NO excuse.
There were some other shockers in the survey that I won’t repeat because it just proves that people aren’t paying attention. Honestly, it’s hard to feel sorry for people (and I’m truly an empathetic person) when they don’t put out any effort to understand their benefits.
Get your head out of the sand people and start putting in a little effort on even the most basic and important things.
Expenses
In another survey, this one on retirement expenses, about 55% of adults don’t know how much they’ll spend going into retirement. Personally, I think this is more like 80% or more. I can honestly tell you both my sisters (58 and 64) don’t know how much they spend today and don’t know how much they’ll spend in retirement. I had a conversation with my oldest sister last week and I flat out told her “Do not even consider retiring without knowing how much you are currently spending and how that will translate with your retirement spending.”
I’ve actually told this to many people over the years. How can you retire if you don’t know how much you spend today and how that will translate to spending in retirement? The expense portion of the entire “when can I retire” equation is the probably the most important number to determine if you can safely retire (or not).
“DO NOT retire until you know what you might be spending in retirement. It’s really that simple.”
So people, get your head out of the sand and start tracking your expenses. It’s best to track them for a full year so that you can experience an entire cycle of all 12-months. Then analyze the numbers to see how those expenses will translate in retirement. What new expenses will you get in retirement and what will go away?
Bottom Line: DO NOT retire until you know what you might be spending in retirement. It’s really that simple.
Health Care
Well, we just spoke about overall expenses but there is one thing most people know nothing about as they head into retirement – health care costs and options.
For example, Fidelity found that most Americans underestimate what healthcare expenses will be in retirement. The average person expects retirement costs to be $41,000 — a $274,000 shortfall from Fidelity’s estimate. Old age equals more doctor visits in a year than you’ve probably had in your first 70 years of life. My in-laws are ALWAYS at the doctor (and I mean ALWAYS). A younger, healthier person just can’t understand this but it’s something we must accept and embrace.
“The average person expects retirement costs to be $41,000 — a $274,000 shortfall from Fidelity’s estimate.”
The questions to resolve is what will you going to do for health care (especially if you retire before 65, when Medicare kicks-in) in retirement, how much will it cost, and how will you pay for it? Again, these are basic blocking and tackling questions that need to be answered before anyone considers retirement.
Other Considerations
Just so people are caught off-guard, here are some random things to consider in what should be a long list of items for retirement consideration:
- Seniors Live Alone – Nearly one in three seniors who weren’t in a nursing home lived alone, with older women almost twice as likely as men to live alone. And, seniors get more isolated as they get older: Nearly 1 in 2 senior women over age 75 live alone. Don’t be caught unaware of this fact and plan for it.
- Social Security Tax – Does your state tax any of your social security? Several states tax some or all of your hard earned social security tax do don’t be caught unaware and find out how your state handles social security taxation.
- Estate Planning – I’m guilty on this but it will get done before I retire, which is a promise I’m making. According to AARP, though most younger people don’t have an estate plan (even those with kids), 81 percent of those age 72 or older and 58 percent of boomers (ages 53-71) do, in fact, have estate-planning documents. Make it easy on your heirs to receive your assets in the best and easiest way possible upon your death.
- Pensions – For those with a pension, you must understand all your payout options and know what your estimates will be at certain retirement dates. How soon will the pension pay? Will it pay monthly or twice per month? Should you take a lump-sum payout or the annuity payout?
- Income Streams – It’s important to know where your cashflow is sourced and the timing of those funds. What’s your process in managing your cashflow? How will you manage surplus or shortfall’s of cashflow on a monthly or annual basis? How much cash should you hold in Year 1 of retirement? What about Year 10?
- Sequence of Returns Risk – Having a plan to mitigate this risk is a significant part of retirement planning and it can be the one single issue that could ruin your retirement. So, you better have a plan.
- Intermittent Expenses – Costs like new furniture, computers, carpet, cars, tires, etc… that occur infrequently (but they do occur) need to be accounted for and funded. What is your plan (knowing putting things on your credit card is not a plan)? We will be using a sinking fund that we’ll pay monthly into a savings account based on the life expectancy of each potential item. That’s our plan so what’s your plan?
There are many (many) more items to consider before retiring but I think you get the idea now. It’s a true statement that most people plan their vacations better then they do their retirement. It’s hard, so if you can’t figure it out yourself then get help.
Summary
Sure, I was triggered to write this article but it happens all the time. And the rose-colored glasses people use to think about retirement keeps them from confronting the tough issues. It’s just too risky to not address a laundry list of items before retiring.
I may have ranted some in this article and, potentially, been a little harsh (see picture above) too. But planning for retirement is tough work and you must the full capacity of your brain. At a minimum, you must put in some effort because some decisions you’ll need to make are simple once you have the facts.
I wish everyone success but please get your head out of the sand and take off those rose-colored glasses. They will only hinder your ability to have a successful and wonderful retirement.
Thanks for reading!
Mr. TLR