5 Questions To Help Physicians Understand If They Are Really Ready For RetirementSubmitted by Harvest Asset Group | Fee-Only Financial Planner Portland ME on January 15th, 2020
By Michael Donahoe
Are you ready for retirement? That seems like such a simple question to answer, but you and I both know that it isn’t. How do you even know when you’re ready?
Sure, you’ve done your homework. You’ve used the online tools that are supposed to tell you. You’ve read the articles. But you’re still not sure. That’s because those tools are generic, giving boilerplate advice. You, on the other hand, are a unique individual with unique needs and wants. If you really want to know if you’re ready for retirement, you need to be able to answer these following 5 questions.
1. What do you want to do in retirement?
First, we have to define retirement. What is retirement to you? Not working? That only tells you what retirement isn’t, not what it is. What is it that you plan on doing once you stop working? Whether you hope to travel the world, pick up a hobby, or just relax in front of the TV when you’re not caring for the grandkids, the first step in determining your retirement readiness is envisioning what it is you’re looking to do.
2. How much are you currently spending?
The second step in determining if you’re ready to retire is taking stock of your current spending. How are you going to forecast your spending in retirement if you don’t even know what you are spending right now?
If you aren’t already tracking your spending, look back at your last three months’ worth of credit card and bank statements. Categorize your spending so that you can easily recognize which expenses will follow you into retirement and which will end with your career. Also consider irregular expenses. Are car repairs, vacations, and electronics purchases accurately reflected in your last three months’ spending history? If not, add them in. You need a clear and accurate picture of how much money it takes to fund your current lifestyle so that you can project your retirement needs.
3. How much will retirement cost?
Once you understand what your present lifestyle costs, you can start to calculate what retirement is likely to cost. This is where you combine the answers to the first two questions. What expenses are associated with that idyllic retirement that you dreamed up? Take your current spending habits, subtract any that will disappear when you stop working, and add in any new expenses that you plan on incurring in retirement. Don’t forget to include things that relate more to normal aging than your specific goals, such as healthcare costs. Once you have a realistic idea of how much money you will need in retirement, then you will have a more concrete number against which to measure your retirement readiness.
4. What is the role of your investments going to be?
Now that you know what your financial needs will be in retirement, you need an income strategy to meet those needs. Most retirees need to make some important decisions to optimize their retirement income strategy. Do you have a pension? Do you fully understand the election options for your Social Security benefits? How much of your retirement income should come from investments versus fixed and reliable sources of income?
Regardless of your overall income strategy, your investments are likely to play a role in meeting your income needs over your lifetime. Are your investments invested in a way that reflects your capacity for market risk in retirement? And are your investments likely to produce a long term rate of return which helps achieve your goals?
In addition to reviewing your account balances and returns, you need to look at the tax status of your savings. You will need to accumulate more in a traditional IRA than you would need to in a Roth IRA because you’ll have to pay taxes on the first and not the second. When you evaluate how much money you need to retire, don’t forget about the effects of taxation on decreasing your assets.
5. What are the chances that you’ll be able to meet your goals?
None of us has a crystal ball, so there’s no way to know for sure what the future holds. You may have calculated your retirement readiness based on a 5% rate of return, but what if we enter a recession? Or what if your spouse ends up needing long-term care? How will that affect your ability to have the retirement that you’re dreaming about?
While we tend to think in a linear pattern, life does not work that way. The unexpected will come, both good and bad. Instead of just measuring your readiness by the number you calculated in question #3 based on your investments from question #4, you need to take all possibilities into consideration. You may have enough money according to your calculations, but what are the chances that retirement will actually reflect your calculations?
How We Can Help
It can be hard to consider all the possible outcomes of your retirement and the probability of your success. That’s why we at Harvest Asset Group use specialized financial projection software assesses the likelihood of you meeting all of your goals over your lifetime, taking into account inflation, market volatility, and taxation.
Once you have a green light, we can develop and implement strategies to help minimize impact of market volatility and excess taxation associated with making routine distributions from your savings to meet your income needs.
Are you ready for retirement? If you want personalized, professional help to answer this complicated question, call us at (207) 775-1151 or email us at firstname.lastname@example.org.
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.