Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Can I afford to retire? Is it the right time? Here is how I answer those questions from my clients.
Those questions are on the minds of clients everywhere, from those riding the subway to driving in rush hour traffic, even millionaires swilling their chardonnay on private jets. When clients ask this question, they are like the millions of people who get up and go to work every day, hoping that one day there will be an easy answer.
While there is no one magical answer or solution, I have educated myself on a few factors to make an informed decision. Let me state a few aspects to consider beforehand to alleviate the worries that ascend with this question. So, can I afford to retire?
When I meet with clients, I always encourage them to begin by envisioning their retirement goals. For example, some may wish to retire gradually and continue working part-time in a consulting capacity or start a new business. While many people transition to full retirement smoothly, I have often observed many retirees seek to fill the void in their life from no longer working. I have encountered many clients approaching retirement who choose to either postpone retirement or work reduced hours in their job before ultimately transitioning to full retirement later in life.
One of my clients (unmarried with no children) opted for an early retirement at age 60. He could retire comfortably, but he chose to continue to work and started his own beer distribution business. This was his “retirement transition,” as his previous job demanded strenuous work. His retirement goals included lifestyle choices such as traveling for leisure and moving to another state (a “snowbird” client). He had long-term planning goals for gifting and estate planning. That is how I envisioned his retirement goals.
The next stage in planning is to develop a retirement budget for living expenses. This is crucial, as it determines if one is comfortable to retire early. Several factors, such as longevity, net worth, debt, health and medical expenses and income resources must be considered. There are other factors, based on personal circumstances and retirement goals.
As an example, I recently met with a high-net worth couple (in their late 40s) who were inclined to retire early at age 60. They had a decent source of income. The husband worked at a senior position for a conglomerate. The couple were still in their accumulation phase of life and planned to continue to save and add to their net worth. However, their projected retirement budget was on the higher side ($250,000 to $300,000 per annum), which could lead to depleting their principal over time. They needed to re-evaluate their early retirement goal or reduce the retirement budget, such that the capital is preserved.
Most clients want to preserve the principal balance of their accounts for future use, emergency spending, or to pass to their family. I use a 5% rule of thumb. Under normal market circumstances and with most asset allocations, keeping your withdrawals to less than 5% of your total portfolio value will provide the best opportunity to keep your principal balance intact. In the retirement phase, sources of income will be pensions, annuities, Social Security benefits, withdrawing from your investable assets, required minimum distributions and other sources of income. Certain government employees, teachers, and some workers in public businesses may be eligible for traditional pension plans as well.
I discussed Social Security benefits and how they can be used as a source of income during retirement. Clients have an option to collect the benefits early at age 62. However, the benefits will be reduced. If they wait for the normal retirement age (70), they get additional benefits for every year they postpone. Similarly, Medicare eligibility starts at age 65. But regardless of your age, having a plan to cover anticipated health care premiums and expenses is a critical pre-retirement step. Employer-based pension plans can have lucrative early retirement options or offer an incentive to retire early. Individuals who suffer from an illness may voluntarily or involuntarily retire early due to health reasons. An owner of a profitable venture may be able to capitalize on their share of the business and retire early. Receiving an inheritance is a luxury, but not something I recommend counting on. Paying off debt before going into your non-earning years is always advisable.
If and when a client can retire is based on various factors. My examples are case studies of how clients plan their retirement. It is a daunting question, but with the guidance and research based on individual needs one can attain the required peace of mind with respect to retirement.
Komal Motwani, CFP® is a senior investment analyst at Yanni & Associates Investment Advisors, LLC., a Pennsylvania-based registered investment advisor.