4 Questions to Answer Before You Retire
It's an achievement to make it to retirement. Years of hard work pay off once you have saved enough and get to hand over a resignation letter to your boss. You say farewell, and there may be a few tears as you part ways with your former life. But there's also the excitement of finally starting the new leisurely chapter of your journey.
The next day there's no reason to get up before 10 a.m. You feel so grateful you no longer need to wake up early just to get ready for boring morning meetings. You get up and go downstairs, brew a morning cup of coffee and sit down at the table and ask, "Now what?"
The start of retirement is a time of exploration for some people. There is a new life routine to figure out. Here are a few questions to ponder as you enter retirement.
Do you plan to reduce stock exposure? It's commonly accepted that you should gradually decrease the risk in your portfolio as you age and accumulate more assets to protect. Many people do this by adding bonds to their portfolio in order to reduce volatility during retirement. Unfortunately, there isn't a simple asset allocation that fits everyone's circumstances. Adding more bonds might help you sleep well at night because they reduce volatility, but you also risk outliving your money if you live a long life. You could add more stocks if you have a long time horizon, but a bad sequence of return at the beginning of retirement could cause your portfolio to be depleted prematurely. There's no way to determine the optimum split between stocks and bonds unless you can predict the future, so the key is to be flexible with your spending and never follow any rigid rules. You also want to avoid staying away from stocks completely, because one of the biggest enemies for retirees is inflation. Price increases don't seem like a huge problem now, but there will be a time when the eroding effects of inflation are noticeable again. Almost every retiree will need some stock exposure to fight off the wealth destroying power of inflation.
What is your strategy to withdraw money to meet daily expenses? You spent years accumulating the assets to retire and employing investment strategies to grow your nest egg. Most people spend too much time thinking about how to tweak their portfolio for maximum gains and too little time optimizing how they will withdraw their assets in a tax efficient manner. You need to give just as much throught to the withdrawal phase. Decide how much you need to spend regularly and where the funds will come from. Without a paycheck and with your assets spread between pre-tax, post-tax and taxable accounts, you want to know exactly how to take money out without paying more in taxes than is absolutely necessary.
What do you plan to do with your assets? The flip side of not outliving your money is the opportunity to leave money to your heirs once you pass away. You could leave it to your children or grandchildren, donate the sum to charity or something else. Put together a plan to make sure your cash gets used in a way you approve of. You may also want to start gifting while you are still alive so you get to see the fruits of your contributions.
What do you plan to do every day? Finances are an essential part of retirement, but this question may be the most important one to answer. It's easy to start relaxing and slow down once you retire because no one is pushing you to stay active. However, those who don't keep busy could see their health erode, and no one wants to age prematurely. By staying active, you will have the energy to pursue physically demanding activities, but leisurely ones will be more enjoyable with fewer aches and pains as well. Staying active can make even being a couch potato more enjoyable.
As you linger over that first coffee of retirement, hopefully you are off to your next activity with a perfectly clear idea of where the money to fund daily life is going to come from. You've already spent years contemplating retirement's toughest questions. It's now time to enjoy it.
David Ning is the founder of MoneyNing.com.