One of the most common questions we receive from clients is, “Can I (we) retire?” We typically look first to a retirement cash flow projection to answer that question. We get an initial sense of when retirement will become possible by sifting through the numbers, applying a set of assumptions, and analyzing the results.
However, there is more to it than just “running the numbers.” Retirement is not a short-term vacation. Your retirement could last 30 years or more. We recommend that all retirees have a financial plan to ensure they can fund their retirement. However, it’s equally important to be emotionally ready for the transition.
When there is a positive cash flow projection, we focus on how you can withdraw enough money to maintain your desired lifestyle. Even with a healthy retirement account, the absence of a paycheck can be frightening. Coupled with a decline in the stock market, this may cause stress, despite the positive analysis.
One way we do this is to set up a recurring withdrawal that mimics the timing of a paycheck (monthly, bi-weekly, or even weekly). Knowing a deposit will be made into your bank account every two weeks may help ease the transition from receiving a regular salary.
Another strategy we use is earmarking funds in your portfolio to fund distributions for a period. For example, allocating a portion of assets to a combination of cash and ultra-short-term bond funds or even CDs equal to three years of cash needs means that in times of stock market decline, you won’t have to sell stock market investments to fund your cash needs.
What happens if your retirement projection initially shows that retirement may not be possible right away? Don’t get too discouraged. Speak with your financial planner to understand why the projection is not optimistic.
If retirement is a short-term goal, reducing expenses or working part-time may change the picture. Think about why you want to retire and discuss this with your advisor so they can help you identify other solutions that may help you meet your goals.
Retirement projections are a great tool to help you figure out if you can retire. However, this tool should be a starting point, not the bottom line. Having a productive conversation about your needs and desires can help your advisor recommend different paths you may take to reach your ultimate retirement goals.