By BECKY GILLETTE
It used to be that most people retired at the age of 65. But, today, there are options for retiring earlier, and higher benefits from Social Security for retiring later. The timing of retirement can make a big difference in how much financial freedom someone has during retirement.
The number one question when deciding when to retire is, “Do you have enough income to live off during a retirement that could last 20 to 30 years or longer with the greater life expectancies today in America?”
Answering that question requires a lot of variables to be considered.
“We have a software program that will plug in all their assets, all their debts, their real estate holdings, mortgages and assumptions on the growth rate on assets,” said Michael Denny, CPA, CFP, GranthamPoole Certified Public Accountants LLC, Ridgeland. “If you are going to pay off your mortgage by the time you retire, that is never a bad thing. If you can eliminate that mortgage payment in retirement years, that frees up a lot more cash flow. We put in all your assets and liabilities, try to come up with realistic spending needs estimates during retirement, assume a life expectancy, and put that in our software program. When we see the results, we can tweak those assumptions. What if the investments don’t grow as much as we expect? What does that look like? If you end up spending more than you anticipate, how does that change those variables?”
Denny recommends a game plan for retirement be put in place many years before ending your career. It takes planning and the discipline to save.
A lot of what a certified financial planner (CFP) like Denny does is tax and Social Security planning. Retiring at age 62 reduces lifetime Social Security benefits dramatically.
“Social Security planning is an important part of the puzzle when dealing with retirement,” Denny said. “Some married couples I work with, when we run projections of Social Security benefits, it is well over $1 million over the course of retirement. That is pretty substantial. I look at each client’s situation differently, especially with married couples, because there are different strategies to maximize Social Security benefits. If someone is still working, then it would really behoove him or her to delay taking Social Security and let it build up even past the full retirement age because you get an eight percent benefit each year after full retirement that you delay starting Social Security up to age 70.”
Stan Purvis, CPA, CFP, a partner who heads up Horne Wealth Advisors with HORNE, LLP, Ridgeland, said it is important to be disciplined and accumulate some resources while you are working so you can have the retirement you have always dreamed of.
Sometimes people can be unrealistic about what that takes to live in retirement.
“We do run across some clients who have a very optimistic view of retirement, not working and living off a portfolio that may not meet their expenses for the expected life expectancy,” Purvis said. “It can help to work with a trusted wealth advisor, someone who can access what is needed to be financially independent with expected lifestyle needs. When you have more information, you can decide whether to continue working or not in your retirement years.”
Having enough income for retirement is not the only factor that needs pre planning.
“The challenge our practice sees is that when people reach a level of financial independence, they have the challenge of finding out what will take up their time after retirement,” he said. “That is difficult for a lot of people, figuring out what to do with their time now they aren’t working. It is good to have a plan for what you want to do, be it spending more time with family, volunteering with the community, or pursuing a hobby or passion. There are some people whose work keeps them mentally engaged and physically active whose longevity and quality of life are much better if they don’t retire.”
Some people retire only to find that their income is not stretching to cover all the bills. In that case, people can adjust expenses, including perhaps downsizing their home. Or Purvis said they may find that going back to work on a part-time basis may be all they need to bridge the gap.
Purvis recommends a diversified investment portfolio that includes broadly diversified equity stock and high quality bond funds to help provide a return to overcome a potential shortfall from rising inflation costs that can be an issue during later years of life.
“Working with a trusted financial adviser who is a fiduciary with their client and works in their best interest is key to mapping out a retirement game plan so they can have a pleasant surprise when they retire,” Purvis said.
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