Even though life expectancy tables declined as a result of the pandemic, I would like to remind readers that retirement could easily represent a third of your life. I’ve recently encountered a number of people in their late ’50s and early ’60s that are finally getting serious about their futures after stepping away from their careers.
Naturally, there is no one-size-fits-all recommendation, but there are a few key points everyone should factor into their decision regarding when it’s the appropriate time to retire.
Most contemplating retirement need to look at their future sources of income. Some are fortunate enough to still receive a pension. But while pensions are reliable, they tend to be fixed. Consequently, they’re vulnerable to price increases.
Social Security also provides a reliable source of income, and over the years, those receiving benefits do get modest increases. However, I get real concerned that, in order to make their retirement numbers work, some people are forced to take a reduced benefit at age 62.
And I fear even more people will be electing to take benefits early. That’s because in order to receive full Social Security benefits, the age limit is increasing to 67 for those born in 1962 or later.
After pensions and Social Security, there are two other sources of income. One source, of course, is work. You can supplement your retirement income by re-entering the workforce on either a full or part time basis.
For many, this entails turning a passion or hobby into income. For example, with spring knocking on our door, I would guess that many starters on golf courses are retirees.
The other source is the income provided by your nest egg. What you’ve saved and invested is perhaps the most important factor in successfully navigating your retirement years. For many, the most difficult part is calculating if your nest egg is sufficient to carry you through what could easily be one-third of your life.
Keep in mind that most expenses are likely to increase over time, especially insurance premiums. Several studies have shown that a retiree could easily spend $250,000 on healthcare and housing related expenses. In fact, a recent study published by the well-respected Investor’s Business
Daily pointed out that people over the age of 75 spend more on housing than those aged 55 to 64.
The study also highlighted that healthcare inflation tends to rise more rapidly than other key measurements of inflation. And based on history, since the retirement years can extend for such a lengthy period of time, you’re likely to experience two or three significant financial downturns.
Can your nest egg survive a financial storm? It’s not my intent to scare anyone contemplating retiring, but rather to emphasize the point that even during retirement your investment portfolio will likely experience significant fluctuations. That’s why careful planning is essential.
A good analogy is when planning a trip. You hope that every day is full of sunshine, but it’s wise to be prepared for inclement weather. Because there’s a real good chance bad weather is going to happen.
It’s never too early to prepare for retirement. The younger, the better and the more likely you are to have a stress free retirement. Preparation is far better than just winging it and hoping for the best.
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Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.