For most of our working lives, we developed a decades-long discipline to save for important life events....buying a house, kids, college and of course, retirement. Those who have reached this watershed moment often tell me how difficult (and weird) it is to shift to a spend it mindset! Creating a paycheck isn't difficult, it just takes some time and planning!
Save, save, save…..SPEND!
Get ready! If you are closing in on retirement, within the next few years, there is a new word to add to your financial vocabulary. It is decumulation. It means leaving the “accumulation” phase (saving for retirement) and monetizing that nest egg you saved for yourself. In effect, you begin creating a new paycheck for yourself once you have left yours behind through retirement or have dialed your work back for a smaller paycheck. For some of our clients it is exhilarating and for others it is weird, uncomfortable, depressing and/or a little bit of everything. It is definitely a mindset shift and since it is usually combined with other important changes it can be overwhelming. Where to begin?
No Two Retirements are Alike
The fact of the matter, every person or couple enters this phase with different goals, intentions, expenses, wealth, health, and family needs. Even the state in which you live has an impact on your taxes, insurance and resources. Planning for this exciting and scary phase in your life is highly recommended not just prior to beginning retirement but at least annually throughout retirement.
There are different schools of thought about spending in retirement. Two of the most popular are 1/ people tend to spend more in the beginning and then at the end of retirement, the “smile affect”. In the beginning, retirees experience more active lifestyles slowing down as they age. Toward the end, health issues can occur and additional care may be needed.
2/income needs progressively decline as people age. Needless to say, two of the biggest factors are spending and health.
Where to begin?
Deciding how and how much of a paycheck to create, begins with a budget. Itemizing and documenting your current expenses will help lead you to an estimate of your retirement expenses. Your current expenses provide a fairly comprehensive outline of what and where you are spending. The next step is to visualize your new lifestyle in retirement and adjust those expenses up or down. Generally, it is helpful for most clients to rethink their priorities and dial down their spending while still working so that their adjustment to a new reality is less stressful. That may involve downsizing or becoming a renter vs an owner. In any case it requires careful consideration and some long term thinking and planning.
How is a paycheck created?
Your planner will review all of your sources of income which can include
Through careful analysis of your expenses and sources of income, with input from you, an initial retirement budget is created. Calculating your guaranteed income sources (i.e. social security, pensions, rental income, annuities, etc.) will help determine the paycheck that needs to be created from your assets to fund your lifestyle and/or whether further lifestyle adjustments are necessary. Through our experience we know the first couple of years in retirement often require multiple conversations and sometimes portfolios are adjusted to dial up or down the income needed. These conversations are critical to successful outcomes for the client and we welcome all questions and concerns.
When do I take Social Security?
Social Security is a terrific program. As planners we view it like an annuity since it has a lifetime benefit. It also has inflation protection, tax benefits and spouse protection with no investment fee and no market risk. Sweet!
The question of when to take Social Security depends on many factors including health, age, income need among others. Did you know there are 2,728 rules in the Social Security handbook? Spending some time researching your optimal benefits/ages may be worth many thousands of dollars over a lifetime. To learn your benefits create a personal MySocialSecurity account at ssa.gov, the official government website.
In addition, the following sites can help you determine how to best maximize your social security benefits.
All will share the optimal age/benefits according to the inputs from you. Some will do additional work for additional fees.
You have spent your professional life working and sacrificing to save for retirement. Creating a retirement paycheck is the opportunity to pay yourself back for the saving and budgeting you accomplished over time. We have helpful tools available to create a picture of what retirement can look like for you. We can walk through various scenarios to find the one that is best suited for you. As life evolves we can review and re-evaluate as often as needed. Life is fluid and ever-changing. Our planning helps remove the uncertainty and provides guidance and answers for this new phase of your life.
Jenifer Aronson is the Founder of Mosaic Fi.