Retirement is a highly personal concept. Some take the traditional route by leaving their 40-hour work week, while others try to work as long as possible. Retirement planning is less about that one day when you never work again; it’s more about what you are going to do in the future. While everyone retires at different times, trying to identify your path can help you and your family both mentally and financially.
When Should You Retire?
There are a lot of different answers to this question. Most studies point to the average retirement age in America as 62. Social Security thinks anyone born after 1960 should retire at 67. From the financial community’s perspective, the answer is highly dependent on your overall financial situation. Many programs, like Social Security and Medicare, do not start until well into your 60s. Many retirement account rules have penalties for withdrawals before 55 or 59.5. It appears that at least the traditional retirement route will be dependent upon access to these programs or accounts, but that doesn’t mean it has to be that way.
The most extreme version of this income change comes from the “FIRE” Movement: Financial Independence Retire Early. The primary goal of those who subscribe to the FIRE Movement is to save as much as possible in their working years, in order to move their retirement date forward as early as possible. Savings rates of 30% or even 40% can help get to their Financial Independence number that will let them shift their sources of income. Once that age is reached, at 45, 50, 55, etc., they quit their job and live on the accumulated savings, similar to the traditional retirement route.
While that may be too much for most people, the concept can be a better way to think about retirement. Instead of quitting something, plan for the days when your income sources will change. If you go from living on a paycheck to living on social security or a pension, that is a major cash flow change in your financial life. This can be applied more broadly as well. You could sell a family business and therefore stop the distributions, yet go work part-time somewhere as a consultant. The more you plan for those future cash flows, generally, the better the “retirement plan” can work out.
Cash Flow Is Key
One of the largest sources of income for people in their later years in retirement is Social Security. Like it or not, it provides millions of Americans with thousands of dollars each month. Practically, planning for Social Security is important regardless of how far out you are from collecting it. The probability that Social Security will be gone by your retirement is arguably very low. It may look different than it does today, but it will very likely still be an income source that you have access to. That access, at least for now, starts as early as 62 and as late as 70.
After Social Security, Pensions can also have a dramatic effect on retirement dates. Many pension plans, such as those for government workers and teachers, offer estimated retirement benefits. Usually, they are based on years of service and a “multiplier”, which can be tied to your age. We’ve seen this many times at places like Brown-Forman, for example, where retiring at 60 instead of 55 could literally double the pension amount. If you were expecting a $50,000 pension each year in retirement, and your company offers to give you $100,000/year if you work another 5 years, that could be highly enticing and certainly worth planning for.
Starting cash flow streams from your retirement accounts must be accounted for as well. This is standard retirement planning. The whole purpose of saving into the 401k or IRA over the years is to eventually flip the switch and start spending that money. That is when working with an advisor can help you estimate how long your money will last. Someone with $5,000,000 who only needs income of $5,000/month has significantly more flexibility in their retirement date than someone who needs $25,000/month.
It is also worth noting here that one more, less acknowledged constraint to choosing a retirement age is health care costs. Medicare starts at 65 to help retired people with health insurance, but many struggle with health insurance before 65. Someone fortunate enough to retire at 55 and live on their income may have significant out-of-pocket expenses to buy health insurance before 65. Costs could double for married couples if both retire early. Be sure to plan for health insurance coverage as well.
Exiting Today for Tomorrow
So, what can you do today to prepare for retirement? It starts with understanding what can change today. Most of us are already saving into some sort of retirement account, so the natural question is: how do you know you are saving enough? Most people do not need to figure out the exact savings rate needed, similar to the FIRE Movement. But having a directionally accurate answer is very helpful. If you are the type of person who would retire today, if possible, perhaps your savings rate needs to be higher than that of someone who never plans on retiring.
Exiting a business can be another extremely important milestone, one that should take years of preparation. Getting a business valuation to understand how much the company is worth now can help chart forward how much you will have after it is gone. Then, building a plan both for your succession and for the growth of the company can set you up for success. There can be a lot of tax implications here too, so make sure you start asking these questions sooner rather than later.
Finally, sitting down and roughly mapping out your retirement plan can be extremely helpful. Many times, when we show clients a retirement plan that is 20, 30, or even 40 years out, it can feel meaningless. But proper planning can lead to more informed decisions. We have many clients in their peak spending years who are arguably oversaving in their retirement accounts. Life, at least financially, is all about trade-offs. Spending more now means less in the future, but saving too much for the future can strap you today. Get some wisdom on whether you are too far in one direction or the other.
Life Moves On
All in all, retirement planning is an important topic for your financial life. Call it “Future Cash Flow Planning” if you are a never-retire person. Focusing on your cash flow for the next season of life is critical. Each season is specific to you, but could be massively improved with the right amount of planning. Make sure you are doing what you can today to prepare for those days, and work with someone you trust to help you get there.
TC Falkner 