Take it from a professor who has spent the last 10 years focusing on the distribution phase of retirement, here are some lessons to live by.
As a professor at The American College of Financial Services and the co-creator of the Retirement Income Certified Professional (RICP®) program, I’m often making lists of what I think everyone needs to know about planning for retirement. And, on a personal level, as someone who is approaching retirement myself, those lessons are really hitting home.
So, here is my current list of what I’d like to shout from the mountaintops — the five things you must know before you retire.
1. Knowledge Is Gold
Making smarter retirement decisions means more retirement security. Research from Morningstar found that informed (versus naïve) decisions in just six different areas of retirement planning can increase retirement income by 31% — and there are a lot more than six planning areas. Think about what that means: If you invest time to learn your options, you can improve retirement security. That’s powerful. You don’t have to win the lottery or hope that Aunt Sally remembers you in her will — just learn about Social Security claiming, choosing the right Medicare option, or the role of guaranteed lifetime income.
If you want something to get you started, watch these Retirement Income 101videos, or take the Retirement Income Literacy Quiz. If you’re inclined to seek advice, find an adviser who really understands the issues faced at this time of life.
2. Look Before You Leap
Warning: Haste makes waste. So, don’t give up a long-term job before you know what’s next and that you can afford it. This may sound obvious, but a 2018 Bankrate study indicated that 58% of baby boomers claimed ignorance of how much money they needed for retirement. There are many reasons to look before you leap, but here are two. First, giving up a career often means giving up valuable additional retirement benefits, especially health insurance.
Second, if you decide that you miss work or miscalculated how much money you needed to retire (or never calculated it in the first place) finding a comparable job with the same wages at an older age is hard.
3. Levers of success
Pre-retirees looking to improve their retirement plans should understand that there are three main levers that have the most impact on retirement security: retirement age, Social Security claiming age and spending levels in retirement.
- Retirement age. A study from the Stanford Longevity Center found that three months of additional work generates the same increase in retirement income as saving an additional one percentage point of earnings for 30 years. That fact screams “keep working!” Avoid burnout by taking vacations, change your attitude, avoid your boss or choose a role with less income and less stress — but keep working if you can.
- Social Security claiming age. If you’re not living under a rock, you’ve heard the advice that deferring Social Security will improve your retirement security. Believe it. About two-thirds of retirees get more than half their retirement income from Social Security. If you’re in this group, your Social Security claiming decision is the most important retirement decision that you will make. For example, an individual with a full retirement age of 66 will receive 76% more by claiming at age 70 instead of age 62.
- Spending levels matter. Reduce retirement spending and your resources will last longer. If you do this right you may not have to destroy the lifestyle that you’ve become accustomed to. Some options to consider: Stop buying the stuff that doesn’t really mean much to you; become a thriftier shopper (read all those lists of ways to save money in retirement); and/or move somewhere where the cost of living is lower. (See 27 Cheapest Places Where You’ll Really Want to Retire.)
4. Living on your own dime is nerve-racking
Living primarily on withdrawals from your retirement portfolio is not for the fainthearted. Today, many individuals go into retirement with Social Security benefits, a significant account balance in their 401(k) plan, and a few bucks in the bank. It’s unlikely that Social Security will cover living expenses (especially for those who claim Social Security at 62) so this means figuring out how to generate additional income from 401(k) plan withdrawals. How much you can afford to take out each year depends upon a lot of moving parts, including how the portfolio is invested, how volatile investment returns are, how long retirement will last, and whether you are willing to cut back on withdrawals if the market is down.
Given what I know, I’m not willing to have most of my retirement income coming from withdrawals from a volatile portfolio — because I want to sleep at night. Pre-retirees should think about ways that they can increase the types of regular income that will last a lifetime, regardless of how long they live. The first place to look to accomplish this is to defer Social Security to age 70 to increase the stream of monthly income. Another is to choose an annuity form of payment from a company retirement plan, or purchase a commercial annuity.
5. Answer the ‘what ifs’
So far we’ve been talking about the easy stuff, but the hardest part of planning for retirement is preparing for the “what ifs,” like what if you live much longer than expected? What if you or your spouse has a serious health care issue? And what if the stock market tanks in the first five years of retirement? Here’s a helpful chart that we use in the RICP® program that addresses solutions to the 18 risks that need to be addressed while retirement planning. Your plan isn’t complete until you’ve addressed these issues.
There are many twists and turns in the retirement road map, and I’m looking forward to sharing the knowledge I’ve learned over my career teaching financial advisers how to help their clients better prepare for their retirement years.