This is part 1 of a 2 part article series discussing retiring more successfully.
The key to any successful retirement is proper planning, beginning as promptly as possible. We have clients who want to retire early and other clients who want to keep working long into their golden years. Some retirees may want to renovate their home, others wish to travel abroad. While everyone is unique and no two financial plans are alike, there are a few trends that tend to lend to a more successful retirement.
You have worked your entire career with your sights set on the day that you can wake up to your body’s natural alarm clock and have the freedom to set your own schedule, otherwise known as retirement. Do you know if you have enough money to last you your whole life? One rule of thumb to gauge how much you can spend in retirement is the 4% rule, the “Bengen Rule.” This rule roughly states that you can spend 4% of your portfolio’s starting value per year, adjusting for inflation each year, without running out of money. The basis for this rule was a study performed by William Bengen in 1998, which stress tested portfolios over historical periods and found that 4% was the withdrawal rate that made it through all historical periods successfully without running out of money.
So it sounds simple, right? Just pull out your smartphone’s calculator, enter your portfolio value, and multiply by .04 – and that is the value you can spend annually.
Unfortunately, retirement is not that simple. That study was designed as a rule of thumb, not a comprehensive planning tool. Today CERTIFIED FINANCIAL PLANNER™ professionals have much better tools where we can input your individual goals. Some programs can run a “Monte Carlo analysis”, which is a method that runs thousands of trials to show you your probability of success. This is a more dynamic way to evaluate your retirement, because it acknowledges that returns can and will be different year to year. This can also factor in one time or infrequent goals that you plan to incur during retirement.
Have you factored in medical expenses? Make sure that you have proper healthcare coverage prior to Medicare, and sign up for Medicare and a Medicare supplemental plan at the right time to minimize the potential risk of large out of pocket medical expenses. With high costs that are continually rising, proper planning for medical expenses can make or break a retirement plan.
Long term care is another big retirement expense. About 7 in 10 people turning 65 will need long term care at some point. In Victoria, the median monthly cost in 2020 was $5,525 for an assisted living facility and $9,505 per month for a private nursing home room. It is important to research your options and discuss with family. Medicare doesn’t cover long term care and Medicaid will only pay after you have depleted most of your assets.
While we often focus on financial aspects of retirement, the non-financial considerations can be just as important. Be sure to have plans for your newly found time. When working at a career for 30 plus years, you had purpose and a routine that filled each day. In retirement, you may feel a lack of purpose and need to develop new routines. A new or rekindled hobby, volunteering, or travel can help fill your time and provide a sense of purpose. For mental and physical health, planning where you spend your time in retirement is critical. Studies show that staying physically and mentally active in retirement lowers the risk of dementia and heart disease, improves blood pressure, and boosts the immune system, among other health benefits.
A CERTIFIED FINANCIAL PLANNER™ professional can help you put your goals, financial resources, and retirement strategies together to form a successful retirement plan. In the next article of this series I will discuss some specific strategies to consider.
Published in the Victoria Advocate
David Faskas is a CFA and CFP® Professional with KMH Wealth Management, LLC. He specializes in investments and portfolio management. He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing member of the firm.