If you're like many people, you've worked for most of your life. You're used to working -- and like any habit, breaking that routine can be jarring. Though going cold turkey is an option, many experts don't recommend it.
In fact, many retirement plan advisors recommend starting your transition from the workplace into the world of retirement at least five years before you actually plan on retiring. Beginning the transition process 10 years out may be even better!
By providing yourself with time to plan your retirement, you can ease into this major life change, as well as ensure that you're saving enough money to fund a comfortable retirement lifestyle.
Here are 4 ways to ease your transition from work to retirement.
Calibrate Your Comprehensive Financial Plan: How Much Do You Need to Save?
Start by creating a realistic picture of how much money you'll need to fund the retirement lifestyle you want. Whether you're dreaming of luxurious, round-the-world cruises or simply staying home and puttering around in your garden, your financial strategies need to support the costs of your preferred lifestyle.
Now it's time to paint a realistic picture of what your day-to-day expenses will be. Creating a budget that takes actual expenses into account is key; unfortunately, many retirees tend to underestimate how much money they'll need. Though conventional wisdom suggests that you need about 80 percent of your pre-retirement income to life comfortably in retirement, in reality, medical costs, health emergencies, new roofs and failing transmissions can derail even the best-laid plans.
Be prepared for the unexpected and include worst-case scenarios in your budget. Keep in mind that the cost of health care and long-term care are projected to rise, and that most seniors need these services as they age.
Wealth Management Strategies: Social Security
The sooner you plan your social security strategy, the better. Sit down with your retirement planning advisor and create a retirement income projection that compares the difference between maximum and minimum Social Security benefits.
Why? Because if you claim Social Security early, at age 62, you may receive up to 30 percent less than if you wait until age 70. To avoid losing this substantial sum, plan to rely on other income for as long as possible to ensure you get the most returns out of the money you've paid in all these years.
Strategic Financial Planning: Identify Other Income Sources
Social security should not be your only income stream in retirement. You should also consider:
- Retirement accounts such as IRAs, Roths, 401k, 403b
- Part-time work
- Your home
Think of these components as part of the retirement puzzle. You'll need to consider how much income security you need, where to allocate your assets and how much risk you want to bear.
For instance, if you invest in stocks, then pull funds out, you're bearing risk. If you reduce your spending habits, you're cutting risk. Keep your life expectancy in mind, as well; that money needs to last on average for 20 to 40 years, so you may need to assume some risk to gain return. These complicated issues can best be navigated with the help of a trusted retirement investment advisor or wealth advisor.
Practice Makes Perfect: Take a Trial Retirement Run
Practice retirement by living within the means that you've set for yourself in your retirement planning process. This is a good way to get used to living within a more restrained budget, and can also help you determine whether or not your plan is realistic.
Of course, you may also realize that your golf-every-weekday, yacht-trips-on-the-weekends lifestyle isn't, well, realistic. To make your retirement dreams come true, you may have to adjust your plan. While adding another few years of work onto your timeline may seem like a burden, the benefits to your portfolio may well make up for it.