By Eric Reich
Retirement is often viewed through the lens of working years and non-working years. Lumping retirement into a single (God willing) 20-plus year period is an oversimplification of a very significant time in your life. While the phases of your working life can typically be broken down into three roughly 20-year time periods which include early-stage career (ages 25-45), peak earning years (ages 45-65) and retirement (ages 65-85), I think retirement age needs to be examined closer. The last stage (retirement) is so important in the planning process because it’s the only one that is difficult to fix if you make a mistake. If a 30-year-old makes a mistake with their investments, they have plenty of time to correct it. If a retiree makes a major mistake, they have a much harder time because they typically are no longer working and have a shorter time horizon compared to younger folks.
Let’s start off with what the specific phases of retirement are. They include pre-retirement, which includes the five years leading up to your actual retirement date. Early retirement runs from roughly the day you retire and continues for about 5-7 years. Mid-stage retirement is the next phase, which we’ll assume falls between years 8 and 14. Finally, late-stage retirement runs from there until the end of your life. These numbers aren’t meant to be exact, but rather an idea of timelines. Over the next few weeks, I’ll break down each of these four phases of retirement by tackling one phase each week.
Pre-retirement or the years leading up to retirement can start as early as the time you seriously begin to think about and plan for retirement. Things to consider during this phase include:
- Maximizing your retirement plan contributions.
These are the years that you want to save as much money as possible leading up to your last working day. If you intend to retire early, you might want to consider Roth 401k or IRA contributions if you intend to stop working before age 59 ½. Yes, there are ways to avoid the 10% penalty for distributions before age 59 ½, but Roth contributions tend to give you the most flexibility.
- Focus on expenses.
Pre-retirement is the time you want to get a handle on what your expenses really are. I would guess that fewer than 50% of retirees I meet with truly know what their monthly expenses actually are. Getting out of debt and cutting expenses helps you understand exactly how much money you are going to need once you get to retirement. Knowing what you will be spending makes it much easier to back into the amount of how much money you will have to have saved in order to live comfortably in retirement.
- Get an idea of what you intend to do once you retire.
One of the most difficult questions for me to answer is how much income you need to have to “live comfortably.” The answer to that question is wholly dependent on what you intend to do with your time in retirement. Do you intend to travel the world? Buy a second house? Take up expensive hobbies? All of these are factors in the amount of money you will need to live comfortably during retirement.
- Where will you live in retirement?
Will you relocate to Florida? Move closer to the grandkids? There are significant considerations related to relocation including state taxation, insurance costs, real estate tax rates, and ease of air travel.
Clearly, there are quite a few factors to consider before you even get to retirement. The sooner you start planning, the easier the transition can be and the more accurate your assumptions may be.
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.
