“It’s All in Your Head”
For a few years, my family and I rented a small ranch in a community where I lived. The homes were built in the 50’s and 60’s and many of the people that lived there were the original homeowners. Most of our neighbors were retired, or getting ready to retire, and many of them had grown children older than my wife and me. We got to know many of our neighbors and enjoyed the friendships that were built and the stories they told.
One neighbor in particular “John” lived next door with his wife. His kids were grown and had families of their own. John had worked for Ford Motor Company in the “finance and accounting department” for 30+ years. One day during one of our meetings that we often had at the bottom of the driveway, he told me that he was getting ready to retire. I asked him how he felt about retirement and he looked at me after a few seconds of thought, grinned and simply said, “Unsure.” A few months went by and John retired.
I will never forget that first winter we got absolutely annihilated with snow and broke several records that had stood for decades. After the first major snowfall that year, I woke up as usual to go to work. When I walked out, I noticed the snow had been removed from my driveway and sidewalk. I then noticed all the driveways and sidewalks, which typically would not have the snow removed that early in the morning, were clear. It didn’t take long to realize that it was the newly retired neighbor, John, who had removed all of that snow. For the rest of that miserable winter, and the next several years that followed, John, shoveled many of the neighbors’ driveways and sidewalks. From that day forward, whenever I saw John, I referred to him as “the association.” The truth is when it comes to retirement, many of us are like John, unsure. Even if we are able to retire like John, is our plan simply to spend that time “staying busy” by shoveling driveways?
The idea of retirement for most is an exciting one! No matter how much we love what we do for a living, we dream of the day we can live our “golden years” doing the things we love like spending more time with family, fishing or traveling.
Planning for retirement and retirement itself is both a game of numbers and psychology. Both areas serve to create the most successful planning and, ironically, a focus on each of these areas individually serve the other.
The numbers are the foundation and lifeblood of any retirement plan. Most people, even the ones actively saving for retirement, do not have a clear and specific idea of what their investments will be and what they can expect from them when they retire. There are several significant factors you should consider when looking at the numbers.
First, it is important to know how much you are going to need and the best way to know that is to use a budget. Creating and maintaining a budget will assist in helping you clearly identify what it costs you to live your current lifestyle and, in turn, what you will need during retirement. At the same time it helps to create financial discipline. A good place to start is the 50/30/20 rule to budgeting. Fifty percent of your income is dedicated to fixed expenses such as utilities and mortgage or rent. Thirty percent of your income is dedicated to personal expenses like shopping or going out to eat. Twenty percent of your income is dedicated to saving for an emergency fund in the bank or in your retirement savings.
Next, it is important to establish expectations for retirement. For instance, what age do you want to retire? This answer will provide you with a timeline for your plan. Then you will want to get projections of what you can expect to receive from fixed income resources, like pensions or social security. The difference between your fixed income resources and what you need to live a month, assuming the fixed income is less than your needs, is called the “income gap.” That is the number you will need your savings and investments to produce for you each month when you retire.
You can then take your investments and create some expectations with projections. Take the amount you have saved (along with the amount you are contributing) and apply a rate of return over the period until you reach retirement age. Once you have that “anticipated” retirement investment value you can determine income by taking 3-4% of that investment. This percentage represents a conservative distribution rate you can take each year from your investments with minimal risk of outliving your investment. Historically, 4% has been considered a “safe” distribution rate. However, many experts agree in today's low interest rate environment, 3% is more realistic.
The psychological side of retirement is as important as the numbers. It is important to define what retirement means to you and visualize what it looks like. Retirement for most people comes with a lot of emotions: excitement, anxiety, confusion and fear, to name a few. Many of these emotions come from a lack of planning for your expectations. Things like the fear of outliving your money or worrying if retirement is even a reality are created by not clearly thinking through your expectations.
We all have had situations as children and adults of being in a dark space; like a basement or an attic where we are afraid of the dark. The truth is the dark is not a tangible or physical thing to be afraid of, so what is behind the fear of the dark? In the dark, we cannot see and we have no expectations of what lurks in the shadows. So we are left to assume, and as humans, we protect ourselves by always assuming the worst. Retirement is no different.
It is important to visualize retirement. What will be your goals? Do you want to travel more? If so, what are your destinations? Do you want to volunteer your time? What will you do to “stay busy” and maintain a “purpose” when you are no longer working? Do you want to help your children or grandchildren financially? What kind of legacy do you want to leave and how will you carry it out?
In summary, retirement is a game of psychology and numbers. If you understand that, you will see how the two support each other. The more you know the numbers, the better your mental and emotional attitude will be. When you are confident in the reality of retirement supported by the numbers, the more encouraged you are to make plans. Being aware of the numbers and the psychology of your own retirement planning will help you avoid being like my old neighbor, “John”, unsure and searching for purpose early in the morning shoveling your neighbors’ snow.
Take some time to create a budget for yourself and share it with your spouse (if applies), make sure it lines up with your retirement goals.
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Written by: Ronnie Thompson