(This is an excerpt from the book THE DUMB THINGS SMART PEOPLE DO WITH THEIR MONEY by Jill Schlesinger. Copyright © 2019 Jill Schlesinger. Reprinted by arrangement with Ballantine Books, an imprint and division of Penguin Random House LLC. All Rights Reserved.)
If you’re 10 years or more away from retirement, there are many things you can do to prepare yourself financially and mentally so you make sound spending decisions once retirement arrives. And by “many things,” I mean five key actions you can take in advance to reduce your chances of suffering a painful — and impoverishing — retirement freak-out. Here they are:
Action No. 1: Have This Five-Minute Conversation
Force yourself to sit down and crunch the numbers. I recommend holding a simple five-minute conversation with yourself about your plans. I have these conversations all the time with callers on my radio show and podcast and in a good number of those cases, people have only the roughest sense of how much they’ll need and what decisions they’ll have to make to amass enough savings.
Are you ready? Pretend you’re a caller on my show:
Jill: Okay, nice. Now what do you anticipate wanting to spend on a monthly basis for fun?
Jill: Now add in monthly expenses related to ongoing obligations toward others, like your parents’ care or helping your adult child or grandchild financially.
Jill: Okay, now add up all the expenses we’ve tallied. What’s the grand total?
Jill: Now, calculate your anticipated income during retirement. Will you receive a pension?
Jill: How about Social Security? Do you know what your benefit will be? How about your spouse’s benefit?
Jill: What? You don’t know? Just hop on to SSA.gov.Now, will you have any income from real estate during your retirement? Are you a trust fund baby who’ll get some juicy distributions?
Jill: Now, take your total anticipated monthly needs, subtract you future income, and—presto! — you have that magic number you’ll need to fund. So, what is it?
Jill: Now, calculate how much total retirement savings you’ll need, assuming you’ll be able to draw only 3 or 3.5 percent of your savings each year to apply to your monthly expenses. What do you come up with?
Jill: See? That wasn’t so bad.
Now that you have a reasonably precise picture of your retirement needs, you can assess whether you’ve contributed adequately and will be in a position to maintain the lifestyle you desire. If not, you still have time to make choices that will increase your income during retirement.
You might want to find ways to cut back on expenses, such as selling your house and renting a place instead, or giving up one of your cars. Now is the time to crank up your savings plan, so you can afford to indulge yourself more lavishly when you retire.
Action No. 2: Rethink Your Retirement Age
If after running the numbers you’re not too pleased with what you uncovered, don’t worry. There’s another way to brighten your retirement picture besides saving more, and that’s working longer.
Some people might not be in a position to work longer, while others might get nauseous at the thought of clocking in a minute longer than necessary. For the rest of us, working longer is something we should consider, because it a) provides more time to contribute to your retirement plan; b) prevents us from dipping into our nest eggs and c) can increase our Social Security monthly retirement benefit.
Your Social Security benefits rise enormously if you retire later. While you can access them at 62, doing so will permanently reduce your benefits by as much as 25 percent. Conversely, if you delay retirement until 70, your Social Security benefits will increase by 8 percent each year.
Retiring later can also help inoculate you against the kind of early-retirement existential funk that might result in your making irrational spending choices.
Action No. 3: Dream About Retirement More
So many people don’t know what they’ll do during retirement because they don’t spend enough time thinking it through in advance. That’s a mistake. Now is the time to imagine your post-retirement activities and lifestyle as fully as possible. Ask yourself:
- Do you have any old goals or ambitions you never got around to that you might wish to pursue? How might you pursue them now?
- Are there any physical activities you’d like to take more seriously? How would you do that? Join a gym? Move to a sunnier climate?
- Are you considering moving? Maybe to pursue a certain lifestyle, such as living on the beach, or to be closer to your kids? If so, would you sell your house and rent?
- Which social or civic activities might you like to pursue and what organizations might you join? Many retirees find great joy teaching or coaching young people; do any opportunities of that sort appeal to you?
- Would you like to get more involved politically, either becoming a donor, helping out with fundraising or running for local political office?
- Would you like to spend more time taking care of your elderly parents, your young grandchildren or other family members in need of care? How much time each week? Would you have to move?
The more precisely you can frame your retirement plans, the more grounded you’ll be when you do retire, and the less prone you’ll be to a freak-out and the ill-advised spending that comes with it.
Dreaming about your retirement also allows you to take proactive steps to make the transition to your new activities.
Action No. 4: Embrace the Gray
One reason people fall into retirement funks and wind up spending too much early on is they become ensnared in black-and-white thinking. We tend to draw a bright red line between “work” and “retirement,” where “work” denotes the period of your life when you have an income and “retirement” the period when you no longer draw a salary.
Look a bit closer, and you find that there are shades of gray, or gradations of retirement.
If you’re a doctor, lawyer or other professional and no longer can stomach the idea of putting in full-time hours, could you work part-time? If you’re a professor, could you continue to teach a course or two per semester as an adjunct? If you work for a company or nonprofit, could you stay onboard part-time or as a consultant?
Many organizations are willing to consider more creative arrangements — they benefit from your experience, and don’t need to provide you with health or retirement benefits any longer. You get to stay engaged with your work and draw a partial paycheck, which allows you to improve your quality of life.
You can also find a middle ground for the other side of your financial equation —your spending. Maybe you’ll decide you could go without a car, walking more and relying on Uber. When you’re tempted to splurge on a purchase, ask yourself: Do you really need or want it?
Action No. 5: Hire a Financial Planner
It’s smart to seek out (and pay for) professional help when you’re confronted with a financial situation you haven’t seen before and truly can’t handle yourself. And if any situation meets that criterion for most people, it’s retirement.
Retirement really is a huge life change. You’re in uncharted territory, and it’s okay to admit you need a little help. But please, make sure the planner you consult is a fiduciary! And for God’s sake, if you’re going to hire a planner, be sure to actually listen to him or her.
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