People make plans for retirement- “I’m going to work until 65 and call it quits, enjoy my life, golf more, spend time with the grandkids, travel the country or the world!” However, if an unexpected layoff happens, life can be thrown up in the air.
Whether you’re in your 40’s, 50’s or even 60’s, an unexpected layoff often brings many choices, and how you navigate those choices will affect you for the rest of your life. In an article like this, it’s very difficult to give blanket advice that applies to everyone. There is no one size fits all in financial planning. For that reason, we’re going to write a series of articles for those in different stages of life. We’ll start with those 60 years and older.
60 Year Old and Laid Off… Now What?
If you’re laid off in your 60’s, this is the age bracket where the possibility of retiring early is the most likely. Again, this is not something to be taken lightly. Choosing to retire is making a decision to live without a consistent employer provided paycheck for the rest of your life.
How Can You Tell if You Can Afford to Retire?
Fortunately, this question’s answer all comes down to the math. Typically with clients and prospective clients we start with a conversation about expenses.
Here are some sample expense questions:
1. What are your fixed expenses, or things you must pay for every single month, such as your water bill, heating bill, cell phone, groceries etc?
2. What are your variable expenses, or things you’d like to pay for BUT could probably live without, such as money for eating out, traveling, hobbies etc.?
3. What expenses will increase and go away if you were to retire?
The last one is a bit more nuanced because it requires you to envision what your perfect retirement looks like.
Starting with the expenses that might increase: Will you want to travel 6 or 8 weeks out of the year in your RV across the country? Will you upgrade your wood working workshop and spend more time doing that? Will you want to eat out more often just to get out of the house?
In retirement, you have to understand that every day is Saturday! According to a Gallup Poll, the day of the week most people spend the most money is Saturday. Why? Because you have time to do the fun stuff in life like going out to dinner, seeing movies and hanging out with your friends and family.
There are other, more basic, things you have to pay for every few years that you need to factor in. For example, how often are you replacing the cars that you drive? How much might you spend on home improvements every year, especially if you will now have more time to actually DO the improvements?
What expenses does your work pay for that they won’t anymore? One that many people miss or underestimate is healthcare. Sometimes you will have to pay for this out of pocket if you retire before 65 and are not eligible for Medicare. Also consider your company cell phone bill and car.
What expenses will go away? Maybe you went out to lunch every day while you were working but will be more content to eat at home more often. Maybe you needed to dress up for work and had to continually purchase clothes for that. Are you planning to downsize your home and eliminate your mortgage payment anytime soon?
After we’ve estimated all of these expenses and we have a good idea of what it might cost you to live, make sure you include a little wiggle room for the unexpected.
Then it’s Time to Talk About Income
Only after you’ve penciled down these numbers can you begin to talk about your assets and their income generating possibilities.
Will you have a pension? Do you have only a single life option or will you be able to choose between a single life, joint life and lump sum?
Do you have a 401k, IRA, Roth IRA, SEP, Simple 457 etc?
If you have one of these qualified accounts, what would your strategy be for generating income? There are many options for this namely:
• Bond ladders
• Systematically withdrawing from the principle
• Using only dividends and interest
• 75/ 25 strategy
• Or a combination of these
This is where the professional comes in. We strongly encourage people to work with a retirement income planning specialist to set this up.
For the sake of completeness, let’s say, for example, that you can expect a 3-6% consistent income stream from the balance of your retirement accounts.
It’s important to note that this 3-6% might not be the return on your investments, rather it’s the range of income most people can expect, on a consistent basis, using the most popular income strategies. For example, utilizing the most popular income strategy, the systematic withdrawal approach, Morningstar recommends a withdrawal rate around 3%. This recommended withdrawal percentage is based on Monte Carlo simulations that run a portfolio through all the best and worst case scenarios of returns over a given period of time, to assess the chances that someone will not run out of money. This percentage can be influenced by the underlying investment assets, the desired “certainty percentage”, life expectancy, and an individual’s ability to deal with a variable income stream.
At 3%, a $500,000 portfolio will generate $15,000 a year before taxes (because with 401k’s and IRA’s you have to factor in the taxes taken out). At 6%, you’re at $30,000 a year. With a million dollar portfolio at 6% you’re generating $60,000 a year from your investments alone.
What’s the difference between 3-6%? The income strategy you use. Again, we recommend you speak with an expert about this.
Does Bridging to Your Social Security Benefits Make Sense?
All the pieces of your financial plan should work together. How and when to claim for Social Security benefits is a very individualized decision. Often we speak with people about the possibility of bridging to the date they’re going to take Social Security benefits. This means that you wait to claim Social Security benefits until your full retirement age (typically between 66-67 depending on your birth year), or even 70 years old, after you’ve retired. You cover your expenses during this period of time, between retiring and claiming for benefits, with income from your individual savings and investments. This allows you to take a larger Social Security check when do you eventually claim that will last you the rest of your life. We like this idea, depending on your needs, because it could mean hundreds of dollars a month in additional income over your lifetime, and possibly over your spouse’s lifetime, depending on who has the larger of the two Social Security checks.
Men statistically have lower life expectancies than women and have a tendency to want to maximize their Social Security benefits over their lifetime by claiming earlier. This decision could dramatically impact their spouse if they pass away first. When one spouse passes away, the surviving spouse will only be able to keep the higher of the two Social Security checks, not both. Therefore, if even one spouse has a longer life expectancy, it might make sense for the bread winning spouse to claim their benefits as late as possible so that check is larger for the surviving spouse. A happily married 65 year old couple, statistically, will have at least one spouse who lives to age 92.
Here’s the Bottom Line
After we’ve looked at your expenses, your assets, the different types of income strategies, and how you’re going to take Social Security we can speak with you about whether you’re able to afford to retire and have the lifestyle you want.