More people are delaying retirement or reentering the workforce right now, and anyone who's thinking about retiring soon should understand this new development before making a big decision. Macroeconomic conditions have affected some key retirement risks, making things more difficult for a lot of seniors. Consider these key trends to ensure that your plan is still on track and that you're financially prepared to stop working.
Why are people delaying retirement?
Surveys suggest that people are citing inflation and longevity as concerns that have caused them to delay retirement. Many people are also concerned about the availability of Social Security benefits further down the road, which contributes to income insecurity. Stock market volatility is also a concern for people early in retirement -- it's hard to feel secure if your investment account values are uncertain.
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Conditions in capital markets and the global economy have certainly changed over the past year, so it's a good idea to confirm that your financial plan is still addressing key retirement risks in the world as it stands today.
Determining if you're prepared to retire
At its core, retirement planning is all about replacing enough of the income that households lose when the breadwinners stop working. If you have the financial resources to meet your cash flow needs -- along with a safety buffer to protect against unexpected events -- then you're prepared to retire comfortably. That might seem obvious, but the first step is recognizing the whole thing as a cash flow issue.
The first challenge is assessing the amount of cash that's going to be required to meet basic needs along with lifestyle goals. This is a budgeting exercise. Households should understand the costs associated with housing and transportation that are specific to their circumstances, as well as the average monthly expenses that people incur for groceries, clothing, and other basic household items. People need to take their health into consideration, as well as the typical healthcare costs for seniors and any medical insurance provided by private carriers or federal programs.
People who have plans to travel, dine out, or otherwise enjoy different types of leisure have to incorporate those expenses into their plan, too. Inflation is an important consideration for all these items -- retirement can last multiple decades, so your plan has to ensure that you can make ends meet as the dollar's buying power erodes over time.
You'll never be exactly accurate when forecasting a budget for years into the future, but it's still important to develop a forecast and understand that there's a margin of error on either side of that best guess. This exercise should provide a fairly reliable starting point so you can set goals and work toward them.
Once you can predict roughly how much cash you'll need each year in retirement, then you can figure out where that cash will come from and whether you have your bases covered.
Identifying sources of cash flow
It should be easy to identify the sources of cash flow. Social Security is the bedrock for most retirement plans, and most recipients rely heavily on these government programs. Understanding Social Security benefits is an important step of planning that can't be ignored. Some people also have guaranteed monthly retirement income from defined benefit pension plans or annuities. An advisor or administrator who oversees those accounts should be able to provide a statement or contract that shows the amount of monthly cash flow that can be expected.
Outside of those guaranteed cash flow resources, people generally have to rely on their accumulated assets to produce income. These assets include retirement accounts, certificates of deposit and other cash-like products, brokerage accounts, and potentially even home equity.
Planning for Social Security
Timing the start of Social Security benefits is one of the most important financial decisions that many people will make. Your monthly benefit is determined primarily by the amount that you pay into the system and the age at which you elect to start drawing income. People are allowed to take Social Security benefits as early as age 62, but their monthly check will rise in value for each month that benefits are delayed, up to age 70.
Some people are better off starting as early as possible to maximize lifetime income, while others should take the trade-off to get the largest check possible a few years later. That decision depends on individual circumstances. Each household should check their benefits statement that's available through the Social Security Administration to make an informed decision that accounts for longevity, cash needs, and other income sources.
Turning assets into income
The final piece of the puzzle is understanding the relationship between assets and retirement income. People need to lean on their savings to cover any cash flow gaps that aren't covered by Social Security or other sources of guaranteed income.
It's not quite as simple as selling stocks or bonds for cash. Retirement and other investment accounts should be reallocated in retirement to reduce volatility and produce income in the form of interest or dividends.
When it comes to retirement planning, it's important to think about the relationship between assets and income. It's too easy to get caught up in an asset-focused mindset, as you save income throughout your career and see your wealth grow through investment returns.
People often measure progress by looking at the account balance in their 401k or IRA, which puts assets at the front of mind. The best retirement planners can easily flip that focus to cash flow -- that's a mindset that most people ignore because it's less intuitive throughout their working years. You obviously require cash to pay for basic needs and lifestyle goals after you stop working, and retirement planning truly revolves around ensuring that you have enough cash to meet those demands.
