PREPARING YOUR STRATEGY FOR EXITING THE WORKPLACE AND ENTERING RETIREMENT
Contributed BY ANNA FALLER | NOV. 5, 2022 | The Northern Express
These days, retiring is no easy feat. In a sea of inflation and increased costs, those caught without a floatation device (or a sizable savings account) often flounder. How do you stretch those hard-earned dollars in today’s sink-or-swim marketplace? And, most importantly, how do you make the choices that are right for you?
Northern Express caught up with local financial advisors Dennis Hesselink (Encore Financial Group, Cheboygan) and Sara Hornick (Hudson Retirement Clarified, Traverse City) to talk up-to-date tips and money management for retiring in a modern economy.
STEP 1: FIND AN ADVISOR
We hate to break it to you, but there is no standard retirement formula. “Everyone’s situation is different,” says Hornick. “There are so many different factors that play into [when] someone decides to retire.”
As such, enlisting a financial advisor—specifically one who will work for you (for this, our sources encourage readers to seek out independent firms) and with whom you can build rapport—should be first on your list of retirement to-dos.
“You need someone who’s dealt with all these situations before and can put the pieces together for you,” Hornick says. “The sooner you have someone to guide you, the better.”
STEP 2: REMEMBER TO BREATHE
From here, you’ll likely have a few questions: What should I be doing first? Are some steps more important than others? And the persistent: Have I forgotten anything? (“You don’t know what you don’t know,” agrees Hornick). Fret not, future retiree; step two of your post-work life is simply remembering to breathe.
“The acronym [Hudson Retirement Clarified] uses for what you should consider when preparing for retirement is BREATHE,” says Hornick.
The first letter, B, stands for Budgeting Income (a topic we’ll cover in depth later on). R means Risk Score, which addresses the scope of market volatility your investments can take, as well as the range of return you’ll need to cover your retirement goals. EA is for Evaluating Accounts and Asset Allocation, “that ensures that you’re taking the appropriate risks,” Hornick says, while also avoiding superfluous fees. T and H are Tax Minimization and Health, and the final E represents Estate Planning.
Focus on ticking your mnemonic boxes, and exhale knowing you’re good to go.
STEP 3: FIGURE OUT YOUR BUDGET
Budgeting is a crucial step to planning for retirement. Before you can build that cozy nest egg, you’ll first need to determine how much of your income you need to account for living expenses. This total, of course, is different for everyone.
“The problem we run into is people retire and then they figure out what their need is,” says Hesselink. Approaching the process in this order runs the risk of shorting your savings, and when that happens, he explains, clients can run into trouble.
Your retirement budget should also include wiggle room for tax bracket changes. To put the concept in perspective, Hesselink asks us to consider a scenario in which you and your spouse decide you can survive on two-thirds of your original income. “For a couple whose income is $120,000, that difference of $40,000 means they’re [now] paying taxes at 12 percent instead of 22 [based on 2022 tax brackets and taking the standard deduction],” he says—a sizable chunk of unforeseen savings. “So, knowing where those thresholds are and guiding people to [them] is hugely important.”
STEP 4: SQUIRREL AWAY THAT CASH
Once you have a financial target, it’s time to start putting money away. (And don’t forget to increase that amount if you happen to receive a raise!)
The key to a well-stocked retirement fund is building on several streams of income, a concept known as the “three-legged stool.” There’s guaranteed income like Social Security (which Hesselink stresses won’t foot the retirement bill alone); defined benefit programs wherein an employer ideally contributes a matching percentage (e.g., pensions, 401(k)s, and the like); and your personal reserves.
To get the best bang for your post-work buck, Hesselink recommends stashing 15 percent of your income for savings. “That’s the rule of thumb today for IRAs and matching funds. If you can do that, you can usually live comfortably,” he says.
STEP 5: CHOOSE A TIME
When you retire is up to you, so long as you’ve met your budgeting benchmarks. There is, however, an ideal time to take your Social Security; though it varies for everybody. For the uninitiated, Social Security is based on a foundational amount, which is calculated in relation to a person’s “full retirement age”—in the U.S., that’s 66 to 67, depending on the year you were born. Up to the age of 70, which is when the payment hits its peak, the longer you can delay collecting, the higher your benefit payoff will be.
It’s here that things can be confusing. Though seniors can take their Social Security as early as 62 years of age, collecting it prior to full retirement decreases how much they’ll receive. Worst of all, that adjustment is permanent. “Cost of living [is] also based on that lower rate,” says Hesselink. “Add to that inflation way over that cost of living, the longer people live, the worse [their finances] are going to be.”
Of course, there are exceptions. “The standard [assumption] is that I should wait until my full retirement age to retire, but that’s not necessarily the case,” says Hornick. Those with a history of diminished longevity, for example, might consider an early retirement. “If I’m a man in my 50s, and no man in my family [has lived past] the age of 70, maybe I want to retire in the next few years so I can enjoy some of life before that happens,” she explains.
Marital status, healthcare subsidies, and whether or not you plan to work part time, are also factors to consider. In this regard, expert support is a must. “You have to work with someone who understands the effects of [taking] that income,” Hesselink says.
STEP 6: MONITOR THE MARKET
Hesselink also warns of the dangers of failing to plan for rising prices. “Most people retire on a fixed income without provisions for inflation,” he says. While that might have been par for the course in the past, the current (read: volatile) financial climate requires a more significant cushion.
To calculate the income growth you’ll need to outpace rising costs, Hesselink refers to the Rule of 72. “[By dividing] the inflation number”—which Hesselink estimates at about 12 percent—“into 72, that means in six years you need to double your income,” he explains.
In general, though, a retirement plan should factor in rising costs and inflation. “When we build a plan for a qualified client, that’s what I like to see,” he says.
STEP 7: SET YOUR AFFAIRS IN ORDER
Once your retirement savings are sorted, you’ll also want to take charge of your assets. For most, a will is the most convenient, particularly for traditional nuclear families. To avoid any confusion, however, Hornick recommends all accounts, “no matter what they are,” include stated beneficiaries or transfer of death designation.
For larger estates or those with vulnerable beneficiaries—children, for example, or family members in long-term care—Hesselink recommends a trust, a live document that conceptually owns its assets. Though costly (and you’d need an attorney), they’re a valuable option for ensuring that your property ends up where you intended.
“Who’s making the choices?” Hesselink asks. “You, or someone else for you?”
Other end-of-life obligations could include purchasing long-term care insurance—“The market in this arena has shifted as people are living longer,” Hesselink notes—and broaching the topic with an attorney to put the needed papers in place.
STEP 8: GO-GO!
When you finally reach that promised land of retirement, it’s easy to feel a little unnerved by all that extra time on your hands. “There can be a little bit of depression at first if you’re not ready for it,” says Hornick. “All of a sudden, you’re not on vacation anymore, and you realize, this is my life!”
To avoid that initial shock, Hornick encourages her clients to do some preparatory soul-searching. “It really is about [asking yourself], what’s going to bring you meaning?” she says. “What are the things you’ve always wanted to do, and how can you accomplish those things?”
For starters, Hesselink advises budgeting for travel and leisure expenses. “Build a separate bucket for the things you want to do in your retirement plan,” he says.
The obvious next step is to get going! When discussing the overall span of retirement, both sources detail three distinct stages. The first of these are your “go-go” years, the time in your retirement when you’re unrestricted by health or age. “You’ve got money—go have a blast!” says Hornick.
As retirees get a little older, they enter the mid-range “slow-go” years before the “no-go” years arrive and adventure takes a back seat.
It’s the “go-go” years you want to grab. “I always tell people to take advantage of [that time],” Hornick says. “This is no dress rehearsal! We don’t get a chance to do it again. You’ve got a bucket list, so let’s make it happen.”