After many years as a financial advisor, I took early retirement this year. This has been an interesting and exciting transition after many years of planning for my clients’ retirements.
I realized a long time ago that competent financial advisors generally do a good job of advising pre-retirement people on how to build wealth: how much to save, where to invest, and what products to choose.
But I don’t think we’re doing a very good job of telling people what to expect when they retire.
So here are some observations from a member of the retiring class of 2022.
My situation was different from those who retired in the past because I had a pandemic for two years to practice at home. For example, my husband and I could eat together when I got out of my home office, eliminating the cost of lunch or eating out because I was working late.
But some things about retirement remain true as the pandemic eases.
It really takes several (or many) months for your finances to settle into a recognizable pattern. When I was doing financial planning for clients, I estimated what a retiree would need as a monthly income. This estimate usually had to be adjusted in real time when her paycheck ended.
Although I no longer buy clothes for the office or online appointments, as summer approached I had to update my wardrobe with shorts and t-shirts. We use less gas in the car but spend more on utilities because the cost of heating and cooling the home has increased now that we are home more hours a day.
Spending has increased because we’re traveling more and doing things we just couldn’t get around to doing while at work. Many retirees think so.
As a consultant, I’ve always assumed that inflation would increase the cost of goods and services in retirement, but until recently it hadn’t really impacted financial plans. Then wow! Inflation increased by 8.5% in July 2022 compared to last year.
This happened at a time of seemingly wild and often rapid fluctuations in the value of investments. It can be downright scary to see your portfolio drop significantly in value when you’re retired and not adding money to your wealth.
I’ve seen many market swings during my time and have learned that the biggest mistakes are made in a hurry. We discuss our needs and risk tolerance and intend to stick with our investment plan unless there is good reason to change it, as we did prior to retirement.
That doesn’t mean we don’t keep track of our spending. Studies show that market fluctuations during the first two years that you are withdrawing income from your investments can significantly affect your ability to continue investing until retirement.
You need to keep an eye on income taxes. You have the choice of whether and when you receive income from social security, pension, part-time work, old-age provision and capital investments. All of them have income tax consequences and making the wrong choice will increase your income taxes.
Social security is difficult. You have one submission option and your choice cannot be changed (with a few notable exceptions).
My experience is that most social security agencies try to get you the highest amount of money currently available. This is often not the best long-term strategy for maximizing your utility, and I’ve encountered agents who aren’t trained in alternative strategies. I’ve even known clients who have faced penalties and installment repayments after following recommendations from Social Security officials.
I plan to file for Social Security at age 70 as that is the age at which utility is maximized. But that’s not the best choice for some people. This is where the advice of a trained financial advisor can be very helpful.
Let’s face it: Medicare health insurance planning is a pain. It requires more research than calling a toll-free number to check your zip code, as TV ads suggest. Find a knowledgeable health insurance agent who offers many types of plans—both Medicare Part C (commonly referred to as benefit plans) and Medicare supplements—to get the best advice.
Be aware that just because you stopped working, Congress is still working to change the laws. Among the things they could soon approve is moving the age of required minimum distributions from retirement accounts from 72 to 75.
That means you’ll still need a competent financial advisor after you retire, preferably a Certified Financial Planner Professional, who will provide the continuing education necessary to keep up with these changes. Bonus points if you work with a retirement planning specialist.
Retirement can be an energetic new season in your life, but staying aware of your retirement environment works best.
Barbara McMahon is a CERTIFIED FINANCIAL PLANNER Expert and member of the Financial Planning Association of Greater Kansas City.