Alice: Would you tell me, please, which way I ought to go from here?~ Alice in Wonderland
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
It’s always surprising to me that federal employees making the “retirement decision” will literally leap before looking into this next phase in their life without covering all their bases.
It’s actually not surprising to me. It’s shocking.
The very idea of retirement, leaving your current day to day work life and starting a new phase in your life should classify as a major life event! Retirement is certainly one of the top five decisions right up there with getting married, having kids, and buying a family home. As with any major life event, this one requires careful preparation.
Can I Retire?
When answering the question: Can I retire?, it’s natural to focus on the more conventional questions related to one’s federal benefits:
- When am I eligible to receive full FERS pension?
- What is my survivor benefit?
- Will I be able to continue FEHB?
- How do I access my TSP?
- What is my high three?
- How much creditable service do I have?
- What is the best day to retire on?
All important questions, and all must be addressed prior to retiring. However, they don’t answer THE question: Can I retire?
To answer that question, we need a go a bit deeper both in the financial and the personal arenas.
The large financial questions may include something like:
- How am I going to replace the income I had been making prior to retirement? (Pretty obvious right?)
- What are my sources of income?
- How much will each source contribute to my income?
- How will my income rise with inflation in retirement?
- Do I need to use my investments to support my income?
- If so, do I have enough saved up for retirement?
- How will I be taxed in retirement? How much?
- Do I have gameplan for choosing social security?
- What is my budget?
The non-financial questions could include things like:
- How will I be spending my time? Do I have hobbies? Do these hobbies cost money?
- What do I like to do with my free time? (Now that I have more if it)
- What does my lifestyle look like?
- Am I living in my current home? My current city?
- Will I live in another area of the country for parts of the year?
- Are my transportation needs the same?
- Do I like to travel? Where? What will that cost?
These are important questions, specific to you and not easily answered, certainly not in a financial advice article.
What is Your “Why?”
Which area do you tackle first? The financial or non-financial? As a financial planner, you might guess I would recommend focusing on the financial aspects first.
Nope. Remember Alice in Wonderland. If we don’t know where we are going and what we are doing, the money won’t get us there. You see, money and good financial decisions alone doesn’t bring happiness.
Money and financial decisions properly calibrated around a well thought out great life? Now, that can bring happiness and successful retirement.
Brian Portnoy in his book the ‘Geometry of Wealth calls wealth “funded contentment.” That is a fantastic definition.
How do you know you will be “content” in retirement? Can you fund it? Do you know what the “it” is?
You should, because retirement is going to be very different; every day is going to be like a weekend. Sounds great! However, Monday through Friday used to be about working. You had a routine. For many people working also provided a much-needed sense of purpose.
Giving up the 9 to 5 can open up new possibilities, but it may take some time to get used to. When heading to the office isn’t the primary focus of your days anymore, you could feel a little adrift and at a loss for how to spend your time.
Obviously, taking a break from working might have been part of it, but what else? Did you have certain goals in mind or things you wanted to achieve that you weren’t able to pursue in the midst of your career? You need to ask yourself what retirement means to you and assess if those expectations are realistic. If they are, then figure out what needs to happen next to make your retirement reality align with those expectations.
Like planning a good vacation, how you spend your time in retirement and the activities you are engaged come at a price. Money and Income. That’s where answers to the vital financial questions come in.
How Do You Get There?
After figuring out the “why” and the “what” we only then need to assess the “how?” How are we going to “fund” our “retirement contentment?” How are you going to pay for it?
Will your current entire retirement plan (TSP, assets, FERS pension, social security) support your lifestyle? Do you know how the pieces come together? How much will your social security be? When will you claim it? How much of your TSP will you reserve for income generating purposes? How much will you leave in reserve?
Do you know, or are you guessing?
Are you in such a rush to retire that you will “just figure that out later?” (a verbatim quote from a client)
It is crucial to assess your preparedness for retirement, not your FERS pension eligibility, but on your ability to meet your goals in retirement. From here, we can see if there is a gap between what you really want and what you can really do.
If there is a gap, the time to find out is before you leave your job, not after you filed your retirement paperwork.
I find most decisions at this point of early detection involve making a trade-off in the form of two alternatives.
- Lower expectations for life in retirement in exchange for the benefit of retiring at the time you had planned. Maybe you don’t need all of the bells and whistles you envisioned in retirement. Time is really what you want and you can give up some of your “dream lifestyle” to embark upon retirement earlier.
- Delay retirement and work longer. This is also a tradeoff. By working longer, you will have time to bring your financial situation in line with your ideal lifestyle. You are trading free time right now, for a more desirable life later. During this phase you are not “just working.” You are shoring up your plan; saving more, paying down debt, adding years to your pension thus increasing the income you may receive in retirement.
This may sound like I’m being a Debbie Downer. For those that don’t know who Debbie Downer is, she was a recurring character on Saturday Night Live famous for a negative personality. She was humorously placed into fun situations with up-beat friends and family only to deflate the mood by saying all of these negative, worst case scenario things. Her friends couldn’t stand her but the audience laughed.
When I’ve posed these questions to FERS employees already excited to retire, I can’t help but think I’m their Debbie Downer. Just like the character in the skit, they came to me because they were about to do something fun and amazing with their life! Retire! They left my office with more questions than answers and less confident about retirement. Talk about a buzz-kill.
I’m sure some of them retired anyway. I often wonder how they are doing.
For those that became clients, the process of uncovering goals and calibrating those goals to resources was life changing. For some, this discovery process served only as slight pause in their journey. The additional months in delay only reinforced their confidence in their course by giving some clarity in purpose and in planning.
For others, the pause was longer. Upon realization of what a truly successful retirement meant for them, delay was the best option. Those subsequent years were wisely used to make important course corrections integral in their current retirement success. They may have been fully vested in their the FERS pension, but their retirement needed a few more years.
Look Before You Leap
You’ve got to be very careful if you don’t know where you are going, because you might not get there~ Yogi Berra
Where are you going? What is your definition of success? Although each retirement situation is unique, a successful retirement has the same core ingredients:
- Know what you want.
- Know where you are going.
- Assess the cost. Match resources to cost.
- Take actions that bring you closer to your goal.
- Rinse and repeat.
So, before you leap, take a pause and look. Retirement is meant to be one of the best times in your life. Ensuring your money decisions are calibrated for your life is one of the most important steps you can take.
Early detection is key. I recommend beginning at least 5 years before retirement, but if you are already in that window there is no time like now. After retirement, the options are fewer. You might have to take what you’ve got.
Remember, look, then leap.
The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.”
Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Mission Point Planning Group and Securities America are separate companies
Securities America its representatives, Mission Point Planning and Retirement do not provide tax or estate planning advice. These are services are provided in conjuctions with a qualified tax and/or estate planning professional.