Most of the people I know struggle with one major obstacle in deciding when/if to retire. Can they afford it? We might as well face it. Money is a big deal. Few companies offer retirement benefits any more. If the recession/depression of a few years ago proved nothing, it proved that our own sense of our economic stability can be fleeting. People are living longer and their money must go further. Medical costs are rising. Social Security benefits on their own aren’t usually enough to provide the lifestyle most people want. Additionally, many people look forward to having the time in retirement to do things they don’t have time to do while they are working. Typically, those things cost money.
I may not be the best person to comment on the economics of deciding when to retire because I am one of the few people still blessed with an employer-sponsored defined benefit pension. While nothing is completely guaranteed in this life, my government pension is about as secure as it gets. Also, I am far from a financial expert. I would not presume to give anyone advice on how to evaluate all the economic ramifications in making the very personal and complex decision about when to retire.
What I am an expert on, however, is worrying.
When I was thinking about retirement and trying to decide if I could make it work economically, I did the computations every which way to Sunday. In every scenario, it seemed clear that I would be fine. Still, I could not get over the feeling that I was somehow missing a key consideration and would end up destitute, eating cat food for Thanksgiving dinner. As worriers tend to do, I came up with some strategies to try to control the thing which I feared. While my strategy did not completely end my anxiety, it helped a lot. I thought I’d share what I did, in case any of you world class worriers out there might find them helpful.
I call it my “Three Ps” plan to financially confident retirement. Note that none of these “three ps” actually involve amassing any wealth, changing the amount of money you have, or saving on expenses. Smarter, more financially savvy people than I can probably tell you how to save and grow your retirement funds. I am going strictly from the point of view that “it is what it is.”
Create a tentative budget for living expenses, based on what you currently spend. Make sure to include regular savings to build an emergency fund. You may not need to save as much as you do while working, since you are no longer “saving for retirement,” but you can’t just start spending willy-nilly without saving anything for a rainy day (remember, I’ve moved to the southeast where there are many, many rainy days!) Then consider what is it that you really want to do in retirement and how much money will it take to live the way you want? Be realistic. Many people say they want to travel in retirement. But do you really think you will or is it just something you say because you don’t know what else to do? If you do want to travel, what would that look like? A lavish beach vacation once a year? A six-month tour around the world that will likely never be repeated? A constant caravanning hither, thither, and yon to visit friends and family? And will those friends and family members feel obliged to put you up when you are there hithering and thithering and yonning, thus saving you the cost of a hotel? If there is a hobby you want to pursue, will there be ongoing expenses associated with it or is the cost mostly to obtain equipment, which you may already have? Whatever you decide is important, make sure you include funding your retirement dreams in your living expense budget. If it turns out that your retirement income will not stretch far enough to cover those dreams, you can determine how much longer you need to work to fund them. Then, you decide if your dream to travel or take up polo is a bigger dream than your dream to stop working right now. Only you can decide that.
Pay off your mortgage
Admittedly, this may not be a strategy that everyone can employ. It might not even be the smartest use of money (remember my caveat on not being a financial expert), but there is a huge intangible benefit. No longer paying that mortgage, usually the largest of all the bills we pay, is incredibly liberating. You suddenly have all of this money every month. If nothing else, you are assured of being able to afford shelter, a basic human need. After all, once the mortgage is paid, that roof over your head is all yours. Of course, sometimes that roof needs to be repaired and you need to account for those maintenance and carrying costs, but mortgage is the real killer expense.
For several years before I actually retired, I “practiced” living on the amount of money I calculated to be my retirement income and saved the rest of my salary and other work-related funds. The benefits of this practice were twofold. First, I built up a nice little nest egg that I used, in part, to put the down payment on the home I bought for retirement (which I paid off when I sold the home I had in my old state). Because of this savings, I also knew I had a nice little cushion built up to tide me over any delays in actually getting my correct pension. Secondly, living on only the money I expected to have in retirement proved to me that I could live and live reasonably well on the pension I expected. This was a terrific confidence-builder and security blanket as I “took the plunge” into retirement. Now, many people might not be able to live on what they expect to have in retirement while they are still working because they are still paying expenses that they do not expect to have in retirement- like a mortgage if you are going to be paying it off before or when you stop working or college tuition if you are waiting for that last child to graduate before you retire. You can still employ this “practice” strategy. Figure out how much you are paying for those expenses that will be retiring from your budget when you retire from your job and add that amount to the amount you expect to have in retirement income. Then, live on that total and bank any employment-related funds above that “expected pension plus expenses that will get to stop paying at retirement” amount. Even if there is nothing left over to bank, this exercise will give you the opportunity to really analyze whether the income you will have in retirement will be sufficient to fund the life you want to live.
At the end of the day, it is a scary and exhilarating decision to leave employment income. While we dream of the day we can retire and enjoy the life we worked hard to attain throughout our careers, that elephant in the room trumpets financial doubts pretty loudly to those of us who tend to worry. On the other hand, maybe it isn’t an elephant at all. Maybe it is just our own insecure, self-doubting selves causing a ruckus over nothing. I think the best strategy is just to think things through, analyze your finances realistically, and then…. Just Trust…. Yourself.
So what are your thoughts? Please leave a comment to share your perspective. In the alternative, you can email me at email@example.com.