There are many things a pre-retiree should consider before putting in their two-weeks’ notice. From a financial planning standpoint, these are the big three:
- What are your fixed benefits? Most retirees are eligible for Social Security retirement benefits, and some may be entitled to a pension as well. Visit the Social Security administration’s website (www.ssa.gov) and create an account. There, you will find access to your Social Security report which will show how much monthly income you will be receiving. Don’t forget to subtract out your Medicare Part B insurance premium. If your income is under $176,000 for joint fliers in 2021 the amount is $148.50 per spouse.
- What are your expenses? Try separating them into two categories: needs and wants. Your needs are going to be things like housing costs, groceries, insurance, taxes, medical, fuel, etc. Your wants could be any number of things. Technology makes it very easy to track your expenses these days. There are dozens of apps and software out there that will link to your debit or credit card and categorize your expenses for you. But in my opinion, if you have never done any serious budgeting work before, the best method is to use excel. You can download a transaction history from your financial institution and categorize them manually. This process is far more time consuming and tedious, but it’s work worth doing. Once you get into the swing of doing a monthly or quarterly budget, switching to something automatic is more appropriate.
- What does your portfolio allocation look like? Once you have determined what your fixed income is and what you will need to achieve your goals, identify if there is a short fall. If your monthly expenses exceed your Social Security and/or pension you are going to need to rely on your investment portfolio to fill the gap. Determining what your investment allocation should be will depend greatly on how large the gap is, among other things. This really is the hardest part and is worth getting a second opinion from a fiduciary.
These three steps make up the core of a financial plan. Make no mistake, these steps (and possibly others) are necessary to gain any clarity on whether you can retire and achieve your goals. If you feel overwhelmed or intimidated, don’t feel bad! Afterall, we are talking about planning the rest of your life, it is some heavy stuff. Getting some help will make it feel less heavy and possibly enjoyable.