By Eric Reich
It is not uncommon at all for people looking to retire in the not-too-distant future to question whether they can actually afford to retire. In the absence of a clear understanding of what their future retirement income will look like, most of those folks hoping to retire will simply choose to work longer out of fear of the unknown. This is similar to when those who are already retired spend too little in retirement because they just don’t know how much they can safely afford to spend in retirement. Therefore, they err on the side of caution and underspend. Many times, the fear of not knowing if they can afford to retire is compounded when markets are close to all-time highs. The concern is that if the markets correct, they won’t have as much money as they do now. They are already nervous about having enough retirement savings to live on today, let alone if the market drops 20-30%.
So how do you know if you’ll have enough? First, log onto SSA.gov and set up an account to get your current Social Security statement. You’ll want to know what you can expect as a monthly benefit. Don’t forget that you will likely need to reduce that number some to account for Medicare part “B” premiums, taxes, etc. If you are married, then you will want your spouse to do the same. Once you have these, you can determine what each of you can expect as a monthly benefit. Sometimes you or your spouse might find that 50% of your benefit is higher than your own. If that’s the case, you get the higher of those options (this assumes a full retirement age benefit, claiming earlier or later affects those numbers). Many times near retirees underestimate what their Social Security benefits will be in retirement which causes them to question if they can afford to retire.
Now that we know what your benefits will be, we need to look at your investment portfolio. We caution people not to assume that a very conservative portfolio is better in retirement than a moderately aggressive one. The reality is that with interest rates as low as they are, simply moving everything into very low-risk investments might not get you the income you require. Likewise, you can’t just “keep doing what you’ve been doing” either. Changes to the portfolio will likely need to be made. I would advise that removing several years’ worth of required income from the stock market may be a good idea to protect your retirement income against a large market correction in the early years of retirement, which can help mitigate the sequence of return risk. If you are able to reduce your sequence of return risk, then you may be able to spend a larger percentage of your portfolio each year than if you don’t protect against that risk.
Lastly, it’s important to understand what you actually need to spend in retirement. While many expenses may go down such as healthcare premiums, 401k contributions, commuting costs, etc. others may go up. Now that you have more free time than you had while you were working, expenses such as dining out, travel, recreational activities, etc. may likely increase. Getting your hands around what you will need and knowing where you can cut expenses is important before retiring. Don’t worry if you aren’t 100% sure what that required monthly income is. The reality is that it will change every few years as your retirement evolves. Just have a good idea of what you absolutely need for fixed expenses, and an idea of what you’d like to have for fun, entertainment, travel, etc.
Many times once people considering retirement go through this exercise, they start to get a clearer picture of what retirement might look like. They will be in a better position to make an educated decision about whether or not they can afford to retire. Don’t hesitate to have your financial advisor or even your CPA help you with some of these calculations. The more informed you are, the better the decisions you can make about your upcoming retirement.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations. A lifelong resident of Cape May County, Eric resides in Seaville, NJ with his wife Chrissy and their sons ,CJ and Cooper, and daughter Riley.
