How to Know You’re Ready to “Retire”
- Financial PlanningMy husband came up with this month’s topic; he has been happily “retired” for almost two years now. He knew when he was ready, but wondered if others might have a harder time making up their minds.
I’ve mentioned this in other contexts, but I like to challenge the word “retirement.” The world has moved on from the old model of abruptly stopping work and sitting in an armchair for a couple of years until death swoops in. People live a lot longer than that now, and most of them want to keep doing something after they stop working just for money.
So how do you know when you’re ready to quit that regular job?
1. Your Financial Life Plan says you’re ready. You’ll want to have all aspects of your Financial Life Plan worked out before you stop working for the money. Of course things will change along the way, but having a plan in place is job one; then you can make tweaks along the way. So, how do you know you’re financially ready?
a. You’ve saved enough and have a plan to address any shortfalls (like working, cutting expenses, etc.). Your “retirement” model will tell you whether you have enough savings and passive income (from Social Security, rent, interest, dividends, etc.) to stop working. You don’t have to completely stop working, of course; you could consult or take a lower-paying or unpaid job you really enjoy. The point is that you need enough money saved or coming in to support your expenses for the rest of your life. Keep in mind that you may not always be healthy enough to work at all, so don’t bet on paid work forever.
b. You have a Social Security strategy. You’ll need to decide when to start taking Social Security, and your “retirement” model can help here. Try a few options and see what’s best for you. You can get an estimate of your Social Security payments here. For my younger readers, it’s worth having a conversation with your advisor about whether you will receive Social Security at all, or how much you might receive. How sure are you that the program will still be in place by the time you’re ready to access it? Will you actually get the payout they are estimating?
c. You’re debt-free or have a plan for any remaining debt. You don’t necessarily have to be debt-free, but if you’re not you will need enough income (passive and/or active) to cover your debt payments. If you can refinance any debt to a lower rate, this might be a good time to do it.
d. You have a budget. It’s pretty hard to know if you have enough to cover expenses when you don’t know what your expenses will be. Get clear on how you want things to change after you stop working and budget for that. Will you buy fewer clothes and do less commuting? Will you do more travel? Are you taking up bocce ball?
e. You’ve done an investment checkup. Before you pull the plug on your regular work, think about your investment strategy and talk about it with your advisor. Does it make sense for you to take a step down in volatility, realizing that this will probably also decrease your long-term returns? Should some accounts be set up differently than others? Which accounts will you take cash from first, and what are the tax implications? How much ready cash do you need in case there is a financial downturn?
f. You have a plan for healthcare, including long-term care. If you’re retiring before you are eligible for Medicare (age 65 for most people), you might be able to extend your previous employer’s coverage through the COBRA program. Otherwise, you’ll need to buy individual coverage from a healthcare broker or insurance company, or on an exchange.
When it comes to long-term care, you’ll need to plan well ahead to get coverage in place before you stop working for the money. I suggest getting on that right now; you can find more information in one of my previous blogs.
2. You’re emotionally ready to go into withdrawal mode. You need to be prepared to move from accumulating money to withdrawing money unless you plan to do some work, or you have enough passive income to cover your costs. It can be hard to move from rising to decreasing account balances, so think about how this is going to feel. How will you cope if you get anxious?
3. You know what you want to do next. The more your identity is tied up with your work, the greater the risk of feeling lost or unhappy after you stop. Even if your identity isn’t tightly linked with your work, it’s still important to have a post-“retirement” plan. Whatever you decide to do, don’t become isolated and sedentary because it can literally kill you. Sure, take a little time to decompress and enjoy the honeymoon period, but then get off your keester and get out there! Work with a life coach if you’re not sure what to do.
4. You and your partner(s) are on the same page. Will you and your partner(s) stop working at the same time? If not, what will you do while they work? What do they want to do after they “retire”? Do they know you want to play golf and expect them to join you? Do they want to travel while you are a homebody? It’s important to get clear on these expectations and involve everyone in the planning process, or you might be in for a shock. I also recommend checking in regularly to see how it’s going and then tweaking once you get used to your newfound freedom.
If my husband is any indication, “retirement” can be a wonderful time to grow and thrive. Just make sure you take a few steps to plan before you make the decision, so you can take full advantage of this fantastic stage of your life.
