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5 Essential Pre-Retirement Planning Questions

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Discover The “What”, “Where”, “When” And “How Much” Of Pre-Retirement Planning So That You Enjoy Happiness As Well As Savings.

Traditional retirement planning has it all backwards. You know the drill. You sit down down with your broker or financial advisor and plan your retirement savings as if having enough money is all that matters. Sure it’s important, but it won’t create a fulfilling retirement. You need to start the process somewhere else.

What’s the most effective way to transition from career to retirement? How do you make plans that are more significant than just money? In this article I’ll show you a five question process that takes you step-by-step from fulfillment through finances so that you you not only learn how much money is enough to retire – but you also connect your retirement savings to a plan for a fulfilling and happy next stage of life.

What & Where: Dream The Ideal Retirement

There are tons of retirement planning books and courses, but very few that focus on setting dreams and goals for retirement (the “what” and “where” questions). Instead, most of the information is about getting your finances in order (the “how much” question). Yet, the fulfillment of dreams and goals is what a healthy retirement is all about. It provides direction and connection, gives a sense of purpose, develops creativity, brings satisfaction, and builds a sense of fulfillment during retirement. In other words, it’s critically important. After all, who cares how much money you have if you aren’t living the life of your dreams and excited to be alive each day?

“To accomplish great things, we must dream as well as act.”

Anatole France

So even though most books downplay the “what” and “where” issues as secondary, we bring them to front and center stage for pre-retirement planning because these two issues play a doubly critical role. They not only determine how fulfilling your retirement will be, but they also influence to a large extent when you will retire and how much it will cost. In short, you really can’t do much retirement planning without first answering the “what” and “where” questions.

You’ve probably already taken baby steps with these questions by forming a rough hewn, slightly vague vision for your retirement. Now it is time to fill in the missing pieces by getting detailed. Sure, you intend on reading more and playing more golf during retirement, but take it a cut deeper. What are you going to do with the 2000 hours a year you used to spend working? You can only read so many books and play so much golf. How are you going to create a life filled with meaning that extends beyond tomorrow’s tee time?

The important point is to be excited by what you are heading toward – not what you are leaving behind. Yes, it is good to be done with “workin’ for the man”, but that excitement is only going to last for a month or two before the reality of a retired lifestyle settles in. If you don’t have something worth waking up for each morning then you are setting yourself up for disappointment – a disappointment that is all too common for many new retirees.

Dreaming and planning for the next phase of your life can be exciting. It is like turning the clock back on your golden years to early adulthood where the world was your oyster and the possibilities were limitless. Recapture that youthful spirit of adventure because you are freer now then you were back then. Your retirement is limited only by your creativity. Forgotten dreams, long ignored values, and passions swept under the carpet to accommodate career responsibilities can now be given new life.

Many people mistakenly envision their retirement as a winding down period which is fine if that is your preference. But the likelihood is reasonably good that you will be spending 30 years or more winding down which is not everyone’s cup of tea. One alternative is to consider your retirement as the opening chapter in a whole new adventure on life and see where that takes you.

Make a list of all the things you would like to do once you have more time. What new contributions can you make? What passions can you develop? Where would you like to volunteer? What new things would you like to learn about and what new places would you like to see? Where would you like to live? What experiences would you like to have? Now is the time to do these things because if not now, then when? You’re not going to get many more chances.

“You see things; and you say, ‘why?’ But I dream things that never were, and I say, “Why not?””

George Bernard Shaw

A key point during this brainstorming process is to not edit your thoughts or mortally wound them with practicality before they take their first breath. Just dream and trust where it takes you. You will have plenty of time later for the dream stealers to re-organize and rationalize your dreams, so don’t make the mistake of editing your dreams with rationality now. No harm ever came from letting ideas take life so just accept them as they flow out of your head without any judgment and write them all down – no matter how zany and impossible. You don’t have to act on them, and you can always edit later.

After building your list of dreams gather up your spouse and a favorite bottle of wine and share your dreams together. One coaching client did this exercise and was shocked to learn that his visions of cross-country travel in a motor home with a fly-fishing rod and backpack did not blend well with his wife’s dream to live in a downtown, high-rise condominium near shopping and restaurants. It is better to negotiate these issues now rather than be surprised by them later after you have emotionally and financially committed to a certain path.

Don’t be surprised if you find it hard to conjure up a new vision for your life after decades of career dominating your personal identity. I run into this obstacle frequently with my financial coaching clients so don’t feel alone. Go easy on yourself and work with the process. Even when you do imagine new roles in life that sound satisfying it may be daunting to figure out how to get started and make the transition. Don’t worry. This is a perfectly natural response because you are entering the unknown: it is uncharted territory. It is okay if the water appears murky at first. You have 30 years to grow accustomed to it so just get started … anywhere. Just dream your ideal retirement lifestyle and write it down. Figure out a reasonable next step and start there. Fine tuning can happen later. The key is to work at it until you have something so compelling you can’t wait to get started – that’s how you know you are on track.

“If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.”

Henry David Thoreau

Places to look for clues to your passions include current hobbies and recreation, fantasies, and dream careers that you always thought sounded ideal. Consider looking in the help wanted section just to see what grabs your interest. Go to the bookstore and spend hours browsing for the sole purpose of noticing what interests you. Where do you spend your free time now and where do you spend your extra money? What are your strengths that might be fun to develop, and what weaknesses would you like to overcome? Talk to existing retirees who seem to be having a ball to get more ideas. In short, make it fun and instill a sense of adventure. It is your life and now is the time for you to live it.

The important point of this discussion is to have interests you are passionate about. Ending a career is going to leave a big void in your life to fill. You want interests that absorb you and motivate you to wake up early and stay up late. For some it could be volunteer work, for others it might be a second career or serious hobby, and still others might discover their passion in foreign travel. The key is to find what it is for you. If you would like help then consider how our retirement coaching might be the perfect support system during this transitional period to sort out the issues.

When: Is It Time To Retire?

Once you have a vision so compelling that you can’t wait to get started living it then pick a date when you will turn this dream into reality. Picking your retirement date is the “when” part of retirement planning. It is a necessary precursor to running the cash flow and income projection scenarios required for the “how much” part of retirement planning.

When you retire will effect how many more years you can save, how much longer your savings can grow, your expected pension benefits, and your Social Security benefit. In short, much of your financial situation (“how much”) hinges on your answer to “when”, and also on the answers above to “what” and “where”.

Only after you have answered the when, what, and where question will you have built the proper foundation to accurately determine how much it will cost.

How Much: Are You Financially Ready To Retire?

You’ve probably built a rough guesstimate of your projected retirement financials in the past. Now that your retirement vision and date draw closer it is important to put a fine pencil to tightening up the calculations. You must determine how much your clarified vision for retirement will cost and how you will afford it.

Completing a final check is important because pension plan rules, Social Security, and asset values have a remarkable tendency to change (usually in the wrong direction). The last thing you want to do is quit your job and lock in your Social Security and pension benefits only to find out you were actually a few years and a few dollars short of achieving your goal.

What follows is a simplified version of the how much is enough for retirement question. For a thorough analysis covering all facets of “how much” please see the Special Report on this web site titled How Much Do I Need To Retire? A quick overview providing a few tips from that Special Report is below:

(1) Budget: Now that you are close to retirement the “spend 70-80% of current income” rule of thumb should be replaced with real numbers. Dig into your current spending and get real about how your spending will change based on your answers to the “what” and “where” questions. Are you going to travel, play golf, and dine out frequently, or do you have some inexpensive hobbies that will absorb the bulk of your time? Are you going to downsize your home, move to Belize, or stay put?

Once you’ve estimated a retirement budget you may be concerned if it is actually workable. Can you really live comfortably on it? If you’re not sure then try test-driving it. Now is a great time to practice organizing your life, downsizing, and living within the lower budget constraints if that is the direction you are heading because you still have the income from your job to bail you out if the whole plan is a mistake. Not only will you build confidence in your budget when retirement day comes, but you will also be able to increase your savings for retirement due to the reduced spending.

“How much time he gains who does not look to see what his neighbor says or does or thinks, but only at what he does himself.”

Marcus Aurelius Antonius

(2) Consolidate: Now is the time to round up all your 401(k)s, pension benefit statements, retirement plans, savings accounts, insurance statements, and other financial documents into one pile. If this proves to be an onerous task then it is telling you something. You may want to consolidate some of these accounts for greater efficiency and arrange them into a methodical system. Consider automated deposits, electronic bill paying, and look into services that allow you to view all accounts from one location. By simplifying and automating your assets and record-keeping functions you will gain greater control, simplify the financial process, and free up time for enjoying your retirement.

(3) Social Security: Request a statement that shows how your monthly benefit is affected based on your expected retirement date. The general rule of thumb is the earlier in life you lock in benefits the lower will be your monthly payment. You may choose to wait longer to increase the monthly amount of income or you may have more than enough right now to begin living your dreams. Just make sure to research the alternatives before you commit. Regardless of your chosen retirement date, it is a good idea to apply for benefits three months before you expect to begin collecting so that you don’t miss a payment. Mark the date on your calendar. Also, consider using direct deposit so you don’t miss a check while out traveling through the Amazon jungle or climbing the Himalayas.

(4) Defined Benefit Pension Plans: Now is the time to get intimate with all the nitty-gritty rules, timelines, and options affecting your pension plan benefits. Similar to Social Security, your monthly benefit will be affected by when you begin – the longer you wait generally the greater the monthly benefit. However, an additional layer of complication exists in pension plans because you may have a choice between taking the money over time or in one lump sum. Deciding which is best for your situation is a complicated formula involving expected lifespan, expected investment returns, personal goals, and other issues that may require the support of your financial coach or a fee only financial planner.

(5) Savings Withdrawal Rate: Total all your retirement savings accounts including your 401(k). According to the experts you can theoretically spend 3%-4% of that total in the first year and adjust for inflation thereafter, but there is much well reasoned and well supported disagreement on this subject. For the complete explanation read How Much Do I Need To Retire?” located elsewhere on this site, or you can use the 4% rule as a rough and dirty guideline for now.

(6) Gap Analysis: After completing steps one through five above, your answer to the “how much” question is simply a matter of adding up your income sources from items 3-5 and subtracting your proposed expenses from item 1 to see if there is enough.

If there is a surplus then congratulations – you are a retirement planning genius and ready to embark on the next phase of your life secure in your income needs. You can afford to chase your dreams assuming your budget calculations are reasonably accurate. However, if you are like many who have more dreams than income then continue reading because there are many tips to help you close the savings gap.

Solving “How Much” Shortfalls: Last Minute Strategies To Boost Retirement Income

Many people find calculating their retirement number a sobering experience. How much turns out to be not enough. If you came up a little short then fear not because there are many ways to close the savings gap and find that missing money. Let’s begin with strategies to grow the income side of the “how much” equation first, and then we will examine the expense side of the “how much” equation in the next section.

(1) Delay Retirement: Every additional year you work is another year of earnings to add to savings and another year of living that savings doesn’t have to pay for. Additionally, delaying your retirement date could increase the monthly benefit you receive from both Social Security and your pension plan further adding to retirement income. Put all four of these factors together and the financial effect can be dramatic.Try running various scenarios on your retirement income using later retirement dates to determine if this strategy can help fill the retirement savings gap.

(2) Phased Retirement: Maybe a second career is in the offing for you. There are many social, emotional, and of course, economic benefits to continuing to work after retiring. The added income can go a long way toward lowering the savings burden required to make ends meet, and if you choose new work that you truly love you might even find it beats 30 years of endless free time. Look at your income gap and decide if there is a way to earn the missing money that would be rewarding and fulfilling for you.

“Contentment is not the fulfillment of what you want, but the realization of how much you already have.”

Anonymous

(3) Savings Withdrawal Rate: Just because the expert consensus on first year savings withdrawal rates is 3%-4% doesn’t mean it is right for you. It is a generalized standard that by definition is not personalized for your situation. You might have a family history of early death, poor health, or an unusual skill for growing your investment portfolio at higher rates of return. See the Special Report How Much Do I Need To Retire for alternative formulas and take a fine pencil to your savings withdrawal rate. The difference can be significant and possibly enough to make up that shortfall in retirement income.

(4) Convert Other Assets To Savings: The diamond ring from your ex-husband that you never wear, the mink fur coat from Grandma, the boat that was used once in the last two years, and other valuable assets that are seldom enjoyed can all be sold off to boost your savings. What valuables do you have that you really don’t need or use?

(5) Convert Home Equity To Savings: For many people approaching retirement their home equity can exceed their savings. Converting a chunk of that equity into income producing savings by downsizing, moving, reverse mortgages, or various other strategies can close the gap between income and expenses. For a complete listing of strategies to convert home equity into income producing savings see the related article 27 Retirement Savings Catch-Up Strategies For Late Starters. You will also find many more tips in that article not mentioned here that can help you close the savings gap.

Each of these strategies alone, depending on your personal situation, has the potential to increase your retirement savings enough to solve the “how much” problem. When you put them all together, howeer, they are a powerful set of tools that can substantially change the income side of your financial picture.

Now we will look at the expense side of the “how much” equation…

Solving “How Much” Shortfalls: Pre-Retirement Expense Planning

There are two sides to the “making ends meet” equation, and so far we have focused only on income. The other side, expenses, is at least as important, and often easier to solve.

The reason is because it is often easier to figure out how to live on $1,000 per month less (1,000 * 12 months = $12,000 per year) than it is to find an extra $300,000 in savings (300,000 * .04 percent savings withdrawal rate = $12,000 per year). The two scenarios are mathematically equivalent in terms of balancing a retirement budget, but there are many more fun and creative solutions to reducing spending by $1,000 per month then there are ways to surface $300,000 to $400,000 in savings.

Let’s look at a few possibilities to chip away at the expense side of your monthly budget without diminishing lifestyle.

(1) Move To A Lower Cost Area: For people living in high cost areas where housing prices have soared think about relocating to a lower cost housing market. Consider both out-of-state or possibly a new country. The price differentials between certain housing markets can be enough to fund a significant portion of some people’s retirement needs. For example, $300,000 of equity harvested from your home and reinvested at 7% produces $21,000 per year in income, and your expenses such as insurance, maintenance, property taxes, medical and food will likely drop as well. The savings can be substantial and the new location could be even more enjoyable than where you currently live.

“The real measure of your wealth is how much you’d be worth if you lost all your money.”

Unknown

(2) Downsize Your Home: For those who love where they live and want to stay in the same area consider harvesting some of your home equity by scaling down to a smaller, lower maintenance, less expensive house. This creates a double-win for your savings because you increase investment income while simultaneously reducing or eliminating certain expenses such as mortgage payments, utilities costs, maintenance, property taxes, insurance and more – not to mention having less house to clean and care for.

(3) Pay Off Your Home: Retiring your mortgage before you retire yourself can significantly improve retirement cash flow and lower your risk if things take a turn for the worse. One strategy to achieve that objective during the pre-retirement phase is to refinance your mortgage or increase your payments so that the payoff date is the same as your expected retirement date.

(4) Low Cost Leisure: Golf and travel can be expensive or affordable depending on how you plan these activities. You could spend an entire summer touring Alaska in a car or camper for the same cost as a two week cruise. You can golf or ski for an entire season on bargain senior passes for the same cost as a few days at a high end resort. You can travel full-time, year-round for less than it costs to live an ordinary lifestyle in some areas of the United States. Get creative and stretch those leisure dollars because recreational fun has little relationship to how much it costs.

(5) Become Debt Free: Interest paid is money wasted, and it is antithetical to the retirement lifestyle. You should be collecting interest as a retiree – not paying it. Prepare for your retirement by paying off higher rate, non-deductible debts like credit cards and automobiles. Get in the habit of only buying what you can pay for right now. Eliminating all debt is a simple strategy to lower your expenses without lowering lifestyle. Debt makes the banker rich – not you.

(6) Eliminate Unnecessary Expenses: Professional affiliations, second homes, sailboats, and extra cars are all examples of things that might not be necessary for your retirement plans and could reduce your expenses if they were eliminated. Also, consider cutting the apron strings on adult children that are out of school and not disabled. They should no longer be financially dependent on you after their education is complete. If your retirement budget is tight then there is no room for excess of any sort. Eliminate all unnecessary expenses now.

(7) Revisit Your Insurance Needs: As you prepare to exit the work force and enter retirement your insurance needs will change. Things like disability insurance and life insurance may no longer be relevant and could save you money if eliminated. Alternatively, you may decide to re-purpose your life insurance away from income protection and toward estate planning. Similarly, to protect the assets you have accumulated you may consider raising the liability limits on your homeowners and auto policies, and examine umbrella, long-term care, and supplemental health insurance policies. In short, revisit your insurance needs to determine what is really necessary and appropriate. Your life is changing and so should your insurance coverage.

In summary, there are many ways to reduce expenses without reducing lifestyle. The joy you experience in retirement is more a function of your attitudes and interests than your budget. Get creative in how you reduce spending and you may just find that “how much” is more than enough.

What Else? Bonus Pre-Retirement Ideas To Consider:

Once you have solved the “what”, “where”, “when” and “how much” questions during pre-retirement planning, there is one final thought to consider – what else? What other strategies should you consider that can make a positive difference as you enter the home stretch to a life of freedom, fulfillment, and financial security?

(1) Estate Planning: If you die without proper estate planning it could create unnecessary heartache for those left behind and needlessly waste a significant portion of your assets on taxes, attorney, and probate fees. Have your lawyer review your will, trust, estate and gifting plan, account titling, powers of attorney, and beneficiary designations to make sure everything is up to date and appropriate for your stage in life. You want to be certain that you and your beneficiaries are properly protected. Death is an absolute certainty with the only question being when. Best to get it done now, and get it done right (estate planning that is – not death).

(2) Organize Necessary Documents: When that fateful day arrives and you are incapacitated or dead someone has to sort out your affairs. Do them a big favor and organize all the necessary documents in one place so that they don’t have to stress about missing anything.

“Don’t agonize. Organize.”

Florynce Kennedy

If you choose to keep the documents in a safe deposit box then keep a duplicate file at home for accessibility and an additional set with a trusted family member or attorney. Below is some of the information that should be contained in this file.

  • Location of safe deposit box key and listing of what is inside the box.
  • A master list of all financial accounts with account numbers, contact information, and addresses. Include everything on this list that produces at least one statement annually such as annuities, life insurance, investments, loans, etc.
  • Wills, Powers of Attorney, Medical Directive, Trusts, and other Estate Planning documents.
  • Marriage certificate.
  • Burial paperwork.
  • Property deeds and automobile titles.
  • Military discharge paperwork.
  • A list of valuables and collectibles.

(3) Health Care Insurance: U.S. Government Medicare doesn’t kick in until age 65 so you may need to consider self-insuring if you retire before age 65 and your employer does not extend health insurance coverage to retirees. Even after Medicare begins there are many costs not covered.  For that reason you will want to investigate private “Medi-Gap” policies and build that cost into your retirement budget. Also, you may want to consider long-term care insurance and decide what is appropriate for you

Learn the rules for Medicare and Medi-Gap applications so that you mark the necessary dates to begin on your calendar. Applying late may cause delayed benefits or increased premiums so make sure you know the rules for your situation.

Health care is an extremely dangerous area of retirement planning because the cost of betting wrong can be catastrophic. Proper insurance devours retirement income, but no insurance runs the risk of destroying retirement assets. If you underestimate health expenses you may not be able to afford the quality care you desire or you may use up a lifetime of savings in the process. There is no easy answer so budget liberally in this area and hopefully you will be pleasantly surprised – but don’t bet on it.

In the end, always recognize that your future health and associated health care costs are unknown – and there is nothing you can do about it. Every retirement plan is fundamentally incomplete because of it.

(4) Get Healthy: There is no point in working a lifetime to save for your golden years only to die of a heart attack or other debilitating disease before you have a chance to enjoy it all. Face it, you no longer have the advantage of youth to offset bad habits so you must work hard to make up for the difference. The human body is amazingly resilient and can bounce back from years of abuse when given proper diet, exercise, and rest. A strong health regimen can save you big bucks in health care costs, and it can add more years to your life while adding more life to your years.

(5) Borrow Now: While debt is best avoided for most retirees there are rare circumstances where new debt can make sense such as financing that downsized home or new RV for traveling. The reason it can make sense to do it now before retiring is because it will be easier to qualify while you still have earned income, and you may be able to negotiate lower interest rates and better terms than if you wait until after retirement. In other words, the general rule is to avoid debt, but special exceptions can apply.

(6) Vacations: Make a list of the areas you might consider moving to during retirement and use your vacations while still working to visit them. Take the area for a test drive and see how you like it. If you enjoyed it in the winter then make sure to test drive the summer also. Who knows, it might end up becoming your future home.

(7) Prepare Your Home: If you are thinking of moving or downsizing your home during retirement then get it ready now. Clear the clutter, complete the repairs, and update whatever is necessary to maximize the sales process to your advantage when that day comes.

(8) Second Opinion: Retirement planning is complicated so get a second opinion from a fee-only financial planner. Heck, the stakes are high enough you may want to also get a third or fourth opinion. You may be surprised how much the experts opinions vary depending on background and assumptions. You can learn more about our retirement planning coach services here.

The reality is you are making critical decisions that will impact your financial picture for the remainder of your life. The stakes are too high to rely on any one person’s judgment – including your own. The fact is there are more questions than answers…

  • Should you take monthly payments from your pension or a lump sum distribution?
  • Should you begin Social Security now or later?
  • Should you buy long-term care insurance or accept the risk?
  • Should you buy Medi-Gap coverage or self-insure?
  • What order should you begin withdrawing from your various savings accounts to maximize tax advantages?
  • Should you convert savings to an annuity? If yes, then how much?
  • Should you follow traditional asset allocation models by ratcheting down risk and focusing on income investments, or should you accept market risk in pursuit of growth by remaining invested in equities? How much, and for how long?
  • What percent of your savings can you withdraw every year? What are the assumptions behind that calculation?
  • How should your estate be organized for maximum benefit to you and your heirs?

There are many more questions to consider, but this should be enough to motivate you in seeking professional help. The issues are so complex and the consequences of a mistake are so serious that an experienced planner and tax expert can be worth every dollar you pay them. This is not a situation where you want to cut corners. Educate yourself first, then get a second opinion to make sure you didn’t miss anything critical. It’s cheap insurance.

In Summary:

Retirement is something you worked your entire life for. As you enter the home-stretch now is the time to make proper preparations so you will enjoy it. These final working years offer a unique opportunity to prepare by considering issues that will make the transition as successful as possible.

If you have made it through this article then you have already separated yourself from the masses. Numerous studies show most workers haven’t estimated their retirement expenses and income needs or put together any sort of retirement plan at all. You are a cut above.

By beginning with the “what” and “where” of retirement planning and determining the “when”, you set the stage for not only creating a fulfilling retirement but also accurately estimating the “how much” so that you are not faced with fiscal surprises.

Don’t be mislead by traditional retirement planning literature that overemphasizes the “how much” of retirement savings. Sure, it is an important part of your retirement plan, but as you saw above, proper life planning, goals, connection to others, appropriate insurance, home ownership and being debt free are all similarly important. There is a much bigger picture to planning a fulfilling and financially secure retirement and your retirement planning coach is here to help, so enjoy the process and enjoy your golden years. You deserve nothing less.

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