By Michelle Muhammed, CFP
Amid surging inflation, rising interest rates, and the sharp declines in both stock and bonds, many clients are asking, “Can I still afford to retire now?”
The most accurate answer is: It depends. It depends on whether you’ve established a clear set of goals and on whether you and your financial planner have developed a sound financial plan and strategy to reach them. Most importantly in today’s climate, it depends on whether you’ve been following that strategy, adapting, and updating it as needed.
Having a broader financial plan is table stakes for understanding when you’re able to successfully retire, and it’s much more than selecting the right investments in your portfolio or building a big enough nest egg. In fact, a holistic financial plan incorporates the many moments and decisions in life that intersect with your money. It’s both the vehicle and the road map that gets you from where you are today, to where you want to be tomorrow.
At a tactical level, a sound plan summarizes your current and future income, expenses (with inflation factored in), time frame, life expectancy, assets, investment allocation, liabilities, expected medical costs, and taxes. It accounts for how you want to live out your retirement years, along with other potential financial goals, like turning a hobby into a business or leaving a legacy to your family members. Regular reviews of your financial plan also reveal when adjustments need to be made – such as whether you need to save more, work longer, or change your spending habits.
Let’s take a deeper look into four key components of a financial plan – and the questions you should ask – as we explore what impacts your ability to retire now versus in the future.
First: What is the time frame for the plan? The most common misconception people have is that their time frame is from now until retirement. Retiring from work is not the destination, it’s a stop on the journey. Having enough income to live comfortably until the end of your and your spouse’s lives is the goal. For some people, they want to live well and leave behind money for the next generation. Therefore, your time frame can extend well beyond your own retirement. If you want to leave money to the next generation, you need to evaluate your time frame and plan accordingly.
Thinking long-term is one of the best ways to survive difficult markets and thrive over a decades-long retirement. It is also an effective hedge against inflation. Throughout modern history, this country has faced multiple inflationary periods. Since World War II, there have been seven periods in which inflation was 5% or higher – 1946-48, 1950-51, 1969-1971, 1973-82, 1989-1991, 2008, and 2021-2022. And with the average life expectancy much higher today than in previous generations, you will likely have a longer retirement than your grandparents. With a shorter expected retirement, they could afford to invest more conservatively from day one. For you, it may be appropriate to stay invested in your current allocation well into your retirement since you could have more time ahead of you and may navigate through multiple inflationary periods.
Second: Are you putting your income to work? If you are still employed or have excess income, this may be an opportunity to beef up your retirement by investing more. Would you rather buy something at full price or on sale? Most people would opt for the bargain price. Although investing when the markets are down seems counterintuitive, continuing to contribute to your workplace retirement plan, e.g., 401(k), 403(b), or SEP IRA, and investing your excess cash elsewhere can help you take advantage of dollar-cost averaging and buying assets at a discount, before they bounce back in value.
Third: Do you have cash reserves? If the answer is yes, then the next question is how much cash reserves do you need? It depends on multiple factors including how much guaranteed income, e.g., pensions, Social Security, etc., you have and whether those streams of income have cost of living adjustment(s). Other things to consider include expected big one-time expenses for things like trips and/or home renovations.
Plan on spending cash first in retirement to give your portfolio some time to recover in this environment. Because you may need to rely on your cash reserves, many may need more cash reserves at the beginning of retirement than they originally thought. This approach enables you to tap your cash reserves, which is not earning enough to keep up with inflation. If you don’t have cash reserves, or not enough, then you might want to consider working a little longer to build your savings; or you may plan to work part-time in retirement. Consulting, reducing the hours in your current role, or working in a lower-paying but more fulfilling job, are all options to help you build up cash reserves.
Fourth: Do you have a unique situation? Suppose you’re a bit short of your retirement savings goal, but you need to retire for health reasons or to care for a loved one. You may find that reducing your spending is more manageable than you thought. It’s also possible that you may be able to do some remote work a few hours a week to fill the gap. By having these conversations with a trusted planner, he or she will help you explore the options that make sense for your situation.
With those initial areas addressed, what should your next steps be? To help you plan for this next state of life, the following steps will help you get to retirement and stay there comfortably:
- Speak with a financial planner to see where you stand.
- Review your essential and discretionary expenses.
- Assess your cash reserves.
- Determine your guaranteed income sources and whether they have cost of living adjustments (COLA).
- If you have a traditional pension, talk to your planner ASAP about whether you should do a lump sum or lifetime pension.
- Evaluate your long-term care protection. Many retirement plans will be undermined by long-term care costs.
- Do you have any big upcoming health procedures? It may be wise to have them done while still employed and/or while you have sick leave.
- Evaluate your housing. If you know that you want to relocate, sometimes buying a new property while employed will be easier. Consider the pros and cons of buying versus renting.
- Ask yourself what you are going to do with your free time. If you don’t know you may want to hit pause and develop a plan for how you will stay or get active and be fulfilled.
- Meet with an estate planning attorney to develop a plan for incapacitation and/or death.
While today’s times are challenging, having a conversation with your financial planner can help you weather these storms by building a comprehensive plan that accounts for potential rough patches along the way. Pivoting and adapting your plan might be part of the process, but many may realize they can still retire in this environment and start enjoying their golden years ahead of them.
About the author: Michelle Muhammed
Michelle Muhammed is a CERTIFIED FINANCIAL PLANNER™ and director of financial planning at Edelman Financial Engines. Michelle’s specialties include developing comprehensive financial planning and retirement strategies that enable clients to build, grow, protect and preserve their wealth. Michelle is a financial planner with over 20 years of experience who has had the privilege of helping her clients and their families achieve their financial, retirement, and investing goals. Outside of work, Michelle gives back by helping women and underrepresented groups find their path in the financial services industry.
Neither Financial Engines Advisors L.L.C. nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.
All advisory services provided by Financial Engines Advisors L.L.C., a federally registered investment advisor. Results are not guaranteed. See
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