We are often approached for financial planning by professional women in the sunset of their careers who are looking with a close eye to retirement.
The challenge here is that many women approaching retirement are not financially ready to retire.
If this sounds like you, there are options. We thought it would be helpful to share how we guide businesswomen who are close to retirement but may need to make up for lost time when it comes to saving for it.
First, determine what you want your retirement to look like.
This is going to be different for everyone. What do you want your retirement to look like? Sit back and think through what that life will look like. Will you travel a month a year? Maybe you want to continue working part time in a non-profit. Or move to another state. Or maybe you would like to continue living exactly as you do now. Take some time here to think through what your ideal retirement would look like.
Then, figure out how much that life will cost in retirement.
Once you know what sort of life you want, you need to determine how much that will cost. We start by creating a cash flow spreadsheet that shows your current income and expenses and adjust it for life in retirement.
Determine your total annual income now and expected in retirement. Include social security, pension, passive income, every income source you have. Then, determine your expenses. Break your expenses down into Fixed and Discretionary. Fixed expenses are those you must pay every month. Everything else is Discretionary. You want to get a good picture of how much your life costs now. The biggest expense that can derail your retirement timing is a mortgage, but others like property tax, healthcare, and any other debt can also play a part.
Be sure to add in expenses you think you’ll have in retirement that you may not have now. If you own your own business and pay for personal expenses through the business, these are expenses you’ll have to cover with your retirement funds when the business is gone. If you plan to add new expenses to your life, like increased travel, you’ll want to estimate a budget for those expenses. There may also be expenses you have now that will go away in retirement, like a mortgage, life insurance, disability and medical insurance. And other expenses like healthcare that may increase in retirement. The goal here is to have a good picture of what your life in retirement will cost.
Do you have enough money to cover that life?
Now that you know how much your life will cost, you need to see if you will have enough income to cover that life. For most women, this will come down to a combination of social security and your retirement assets.
How much can you take from your portfolio for your annual income? One rule of thumb is called the 4% Rule. This rules states that if no more than 4% is withdrawn from a portfolio annually, statistically you should not outlast your money over 30 years in retirement. So, if you have $1million and take 40% out per year, that is $40,000. Keep in mind you’ll need to pay taxes on this if the money is in a traditional IRA. Add this amount to your social security and any other income sources, and you’ll have a rough idea of how much you will have to spend annually. Compare that to how much you estimate your life to cost in retirement and you can see if you are on track to be able to afford the retirement you want.
And what if you are not on track to have enough to live the life you want?
We have found a common reason for not having enough money saved for retirement is spending too much and saving too little.
Don’t despair. There are options. They come down to choices of spending less, working longer, and saving more.
Cut Spending: We start with lifestyle costs and look to cut where we can now and in retirement. If there are several years before you’d like to retire, look to cut expenses now and increase retirement savings. Do you really need to have a car payment that is $600/month? Maybe you can cut this in half and save the rest of the cash. Comb through your cash flow sheet to see where you might be able to cut costs and save the difference. Make spending changes, try them out, and then create a budget you can stick with that will allow you to save as much as you can now.
Increase Savings: Do you have the extra cash but don’t know what to do with it? Perhaps you’re making good money now and can sock more money away. Make sure you are maxing out your 401k savings. If you are over 50 you can take advantage of catch-up contributions for retirement accounts. If you have maxed out your retirement plan options, save additional cash in non-retirement investment accounts so the money grows.
Have a strategy for your house: Do you own your home? What is your strategy around the house? For many women, the house is one of your largest assets and the mortgage is a big expense. You could consider selling the house and downsizing. Or moving to another state with cheaper housing costs. Or taking out a reverse mortgage if you have equity. Or paying the house down before you stop working so there is no mortgage payment in retirement. Having a mortgage in retirement will eat up a big chunk of your retirement income, so have a plan around this expense and this asset.
Pay down debt: If you have additional, high interest rate debt, pay it down. Once you’ve paid down the debt you can use this money for retirement savings.
Work Longer: What if you feel your life is modest already, and you just can’t increase savings now? You might consider working longer. We are finding most women in our world want to keep working, but would like it to be on their own terms. There are some great benefits to working longer in life: You don’t draw down on your portfolio right away so it keeps growing; working keeps your brain sharp and provides social interaction, enables you to save more, and allows you to postpone taking your social security benefit, which grows by 8% each year you delay taking the benefit.
Continue to work in retirement: Or consider part-time work in retirement. Supplementing your retirement savings by continuing to work will stretch out your retirement portfolio. And will provide those benefits listed above that come with continued work.
If you are behind in preparing for retirement, the first step to fixing this is knowing where you are financially, and where you need to be. While you might have some work to do to make up for lost time, you do have options. Get started now so you can get back on track and live the life you want in retirement.
If you’d like to learn how we at WealthChoice help women plan to retire, please contact us.
