Why You Should Retire, Even If You Think You Can’t Afford It

A landmark study found that 39% of American workers, some 68 million in all, are changing the timing on when they plan to retire.

Three-quarters of those who are rethinking their retirement timing are planning to postpone retirement, by over 3 years on average. Their reasons are financial, they’ve had:

• to dip into their savings
• their retirement funds have lost investment value
• greater uncertainty about how much money they will receive/have in retirement.

In this video, John Conley  specifically addresses people who were initially within 10 years of their planned retirement date, who are now in the scenario of “should I postpone my retirement for the next (3-5) years, so I can try to ‘catch up’ and feel more confident about my retirement?”

First, let’s get in to the reasons why a person might feel less confident about their retirement situation:

• They don’t know their monthly needs in retirement
• They are unsure if their retirement accounts will generate enough income to sustain their lifestyle wants in retirement
• They are not sure what government benefits will be available (or how much) when they are in retirement (Social Security, Medicare, etc.)

Now let’s address those three things and how to overcome them:

1. Understanding your monthly needs in retirement

Something we keep hammering home here at Rubino & Liang Wealth Partners – understand what your monthly budget needs are (what we often refer to as your Portfolio Income Needs) – make sure to consider things like inflation, taxes, and possible sudden-expenses (new roof, dishwasher, or health change)

Every retirement planning action and decision revolves around your Portfolio Income Needs (PIN).

Imagine planning a road trip without knowing the destination. 

If you don’t know where you’re headed, how can you map out the best route? 

Your PIN is your destination, and once you have it, you can determine the right path—whether that means saving more, working longer or adjusting your spending—to get there successfully.

If you’re putting off retirement because you don’t THINK you’ll have enough in retirement, but haven’t done the leg work to determine that number, will you EVER feel confident about retirement? That’s why we make sure we work with every client to help them understand this number…

2. Unsure if your retirement accounts will generate enough income to sustain your lifestyle wants in retirement?

Having investing strategies with your retirement accounts that are inline with your risk tolerance AND what your monthly budget needs will be in retirement to live the lifestyle you planned for

• addressing inflation
• lower interest rates than in the past
• a possible change in taxes
• Volatility in the market

This may be a hard conversation for people if they have a history of underfunding their retirement accounts. 

If you HAVE been underfunding your retirement accounts, what changes in your behavior will help you contribute more if you are only delaying retirement and not addressing the larger retirement planning picture?

This is where working with a financial advisor can help you get started. Once you know your PIN, you can improve your retirement outlook by following a particular framework that prioritizes certain actions to help you improve your situation. 

Sometimes the priority WILL be to work longer/delay retirement, and sometimes an assessment and reallocation of your investment strategy can be enough to help build the added confidence needed to comfortably retire sooner.

But finding that framework, understanding the proper action items, and executing them now can help alleviate apprehension about your decision to retire later.

3. Unsure what government benefits will be available (or how much) when you are in retirement (Social Security, Medicare, etc.)

Another factor keeping people nearing retirement from feeling confident about actually transitioning into retirement, is questions about what benefits will still be available to them while they are in retirement – specifically social security and medicare.

From an AARP article on 9/22/20: “The facts – As long as workers and employers pay payroll taxes, Social Security will not run out of money. It’s a pay-as-you-go system: Revenue coming in from FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes largely cover the benefits going out.

• Social Security does face funding challenges. For decades it collected more than it paid out, building a surplus of $2.9 trillion by the end of 2019. But the system is starting to pay out more than it takes in, largely because the retiree population is growing faster than the working population, and living longer. 
• Without changes in how Social Security is financed, the surplus is currently projected to run out in 2035.
  Even then, Social Security won’t be broke. It will still collect tax revenue and pay benefits. But it will only have enough to pay {a percentage} of scheduled benefits. 
• To avoid that outcome, Congress would need to take steps to shore up Social Security’s finances, as it did in 1983, the last time the program nearly depleted its reserves. The steps then included raising the full retirement age, increasing the payroll tax rate and introducing an income tax on benefits.”

Why delaying your retirement date isn’t the best option

How does financial stress from inadequate retirement savings affect health?

Talking about money can be really scary – and Americans HATE TO TALK ABOUT THEIR FINANCES.

In fact, an article from Reuters noted that in a Wells Fargo study, 44 percent of Americans point to personal finances as the most challenging conversation anyone can possibly have.

Even discussions around death come in behind conversations about personal finances, at 38 percent – PEOPLE WOULD RATHER TALK ABOUT DYING THAN THEIR PERSONAL FINANCIAL SITUATION!

This can lead to two major factors as to why you might hesitate to discuss your retirement situation and instead just “delay and pray” for a better outcome years from now.

One is called disclosure anxiety — feelings of discomfort at the idea of sharing personal information with a professional advisor.

by not talking to a financial advisor, you can feel as if you ARE on track with your retirement planning situation, solely because nobody has told you that you AREN’T on track.

While you might not be sure if you can retire with the lifestyle you want, you also can’t confirm that you CAN’T live that desired lifestyle, and that’s enough to get you through another day of uncertainty.

The other is evaluation anxiety — expectations of being negatively judged by the financial professional.

Whether it be for past financial mistakes, investment decisions you didn’t know you got wrong, or simply not thinking you have enough money, you might be too scared to talk to an advisor out of the fear of being judged.

But, every year you delay retirement, you’re not just working longer — you’re spending some of the healthiest, most active years of your life… working.

And according to the American Academy of Actuaries, health declines significantly just 5–10 years after traditional retirement age. Delaying retirement because you “just aren’t sure” might mean giving up your best retirement years — and replacing them with years where travel or other hobbies becomes harder, recovery takes longer, and energy is in shorter supply.

Working longer also affects your physical and mental health. Studies from the National Bureau of Economic Research show that continued work past your desired retirement age increases stress, worsens sleep quality, and contributes to chronic conditions.

Here are three key principles to keep in mind to help you talk openly about your finances:

1 – You’re Not Alone

Like we noted before, 44% of Americans are uncomfortable talking about their finances. Hopefully that provides a bit of relief to know that you aren’t the only one hesitant to discuss their situation.

2 – Fiduciaries Are Not Here To Judge

Talking to a qualified financial advisor about your retirement situation is sort of like talking to your doctor about your health and any issues you may currently have questions about.

A financial advisor is there to examine your assets and liabilities, and work with you on a plan that you can — literally — live with, and help you sleep better at night.

There is no need to feel ashamed, because as bad as you THINK your financial situation might be, a financial planner has seen it all, and better to have your situation diagnosed now, than to ignore it and allow it to possibly get worse through avoidance.

3 – Remember, You Steer The Relationship

When you know it’s time to speak with a professional, you want to be able to work with one that makes you feel comfortable.

Building confidence in your wealth management situation and understand how to address those underlying “what-if” questions:

So, how do you calculate your Portfolio Income Needs?

First, you want to add up all of your monthly expenses, this includes:

• Housing costs (mortgage, taxes, utilities, maintenance costs)
• Healthcare and medical costs (health insurance, LTC or life insurance premiums, prescription drugs or copay costs, gym memberships, etc.)
• Groceries and dining expenses
• Transportation costs (auto loans, car insurance, maintenance & fuel)
• Other personal expenses like travel, vacations, haircuts, social club memberships, charitable donations, and so on…

Then, find out if you have any guaranteed income sources in retirement, and what that amount will be. Examples of this include any type of pension, social security, rental income, or some type of annuity.

Subtract the guaranteed income amount from your expenses, and what is left is considered your monthly income gap – the amount that your retirement assets will need to cover for expenses that your guaranteed income doesn’t.

Multiply that by twelve to understand your annual Portfolio Income Needs.

Now, we can make use of this number to find out a whole bunch of interesting things. 

So let’s say a person needs $21,400, and they want to retire at 65 and expect to live till 95, resulting in a 30 year retirement.

If they were to have all the money they needed on the day they retired and have it all in cash, they would need $642,000. 

Now, this is an assumption, and if we were to start using rates of return here and inflation factors, the math gets more complicated. 

But, whether you retire and it’s all in cash or whether you retire and it’s invested, the principle remains the same, which is that the lever around which everything rotates is your Portfolio Income Needs.

And in this scenario here, this person would need $642,000 all in cash on the day they retire in order to withdraw 30 payments of $21,400 per year. 

To bring it all together, if you are in the 10 year window of retirement, and think that you should work for an EXTRA 3-5 years because of other economic factors – it would be worth it to speak with a professional to do a number of things:

• Get a granular look at your retirement situation to see WHERE YOU ACTUALLY ARE on your retirement planning journey (you might already be at the number you need to be, or maybe you just need a few tweaks to the performance of your current portfolio)
• Create a step-by-step retirement plan to put you on the right path to a successful retirement (maybe you DO need to make some additional contributions, or a Roth conversion might be more efficient for portfolio, etc.)
• Help you hold yourself accountable for making the changes needed to stay on the path to achieving success in retirement (kind of like a personal trainer/coach, but for your finances instead of your body)

Whether you’re asking questions about when you can retire, how to manage your investments, or if you have enough to leave the impact you want for your family and community, we’re here to help.