Are you nearing retirement and want to get a better understanding of whether you are financially ready? Let’s talk about a process for figuring that out.
Know Your (Net) Worth
Start by looking at your Net Worth sheet. Think about all of your assets – things like 401ks, IRAs, or your Employee Stock Purchase Plan are typical but don’t forget about savings and investments you hold outside of retirement accounts as well. Basically, take stock of everything you have to replace your income with.
Then, evaluate what the past two years of spending have looked like for you. Don’t sugarcoat it – you need to take an honest look at your lifestyle, and what it costs to maintain it!
Don’t give in to the temptation to try and trim your budget at this point. Many people will want to make their spending look “better” than it actually is by claiming they can cut certain expenses if the tradeoff is early retirement. That is not only unrealistic for most people but isn’t likely to give you a retirement you’ll enjoy anyway.
Building a Retirement Lifestyle You Love
The truth is you want to retire to a lifestyle you love. Even if it costs more, or if it takes a bit longer to plan for, you want to be realistic. It’s better to wait for success than it is to rush to failure.
After you know what your spending needs are, make sure you have an adequate amount of cash on hand. FPC Wealth generally recommends that you have a minimum of 2 years of cash in reserve if you plan to retire early.
That’s because early retirement presents some unique risks when it comes to planning for a lifetime of savings withdrawals since you need to make your money last even longer than normal. A healthy cash reserve protects you from many of those risks.
Tax Considerations
You also need to optimize your savings for tax efficiency. To do that, think about what your taxes may look like over the course of many years, and don’t just look for ways to lower your taxes right now.
Whatever you do, don’t back yourself into a corner. Investment diversification is important, and so is tax diversification. You don’t want to have all of your savings concentrated in one account type (like a Roth), or to “have” to spend a certain way in order to continue living off of your nest egg during early retirement. Save enough and diversify across different account types – Roth, Tax-deferred, and taxable – so that you have options.
Leave Your Options Open
Lastly, it’s also important not to back yourself into a corner when it comes to your lifestyle! Don’t force yourself into living a way that makes you feel constrained just to make retirement “work”. Be open to options and opportunities.
Maybe you have a traditional retirement or maybe you relax for 3-5 years then pursue a second career, start consulting, or volunteer more. Whether it’s for income or fulfillment, don’t close yourself off.
Whatever retirement looks like for you, it’s important that you go in with both eyes open and match your finances to your lifestyle – don’t force-fit one to the other.
Need Help?
We’re here to help you navigate this transition. Reach out to us today if you have any questions, or if you want to learn more about how a comprehensive, fee-only financial planning team can help you.