Hey guys, Mike Frontera here, back with another Retirement Theory Video.
Happy New Year to everyone out there, and I think for the great majority of us, we’re excited to turn the page, in particular with hopes of having the Coronavirus soon being a part of our past, rather than our present. As we’re well aware, Covid-19 has been not just incredibly consequential from a public health standpoint, but from an economic one as well. And for sure, one of the byproducts of that are the countless people that have been forced into early retirement as a result of the pandemic.
And whether you’re suddenly facing retirement due to the Coronavirus, or for some totally unrelated layoff situation, or really whatever the case may be, it can be a make for an extraordinarily difficult time. So, I want to give you some action steps that you can take to make a game plan to deal with retirement when it arrives unexpectedly ahead of schedule.
Now the first thing I want anyone in this situation to appreciate, is the psychological impact that a forced early retirement can have. It is perfectly normal to go through a grieving process, as you might with some other kind of traumatic event. For many of us, much of our identity and our purpose is found through the work that we do. Having that sense of purpose and belonging suddenly stripped from you, in an unceremonious way, can leave you feeling empty, anxious or even depressed. And in contrast to other traumatic events, you’re unlikely to receive that same level of compassion and support from friends and family. You may even get the opposite. You know “lucky you!” or “boy, I wish I could retire!”.
So, it’s vital that you take care of your mental well-being. It takes a lot of energy to prepare and execute a retirement plan. It may be a burden too heavy to carry if you’re overwhelmed with these feelings of anxiety or depression. Often, the wisest action step you can first take is to seek counsel from a mental health professional during this time. They can help you sort through your emotions and retain the strength and clarity that you’ll need to make good decisions for the impactful decisions that are to come.
And you should first start making those decisions only after you’ve objectively and comprehensively assessed your financial situation. How well prepared are you to retire today? You might be in better shape than you think. A lot of my clients that have a plan in place for retirement, would actually still be ok if they were forced to retire 2, 3, or even 5 years earlier.
A comprehensive retirement plan can show you your likelihood of outliving your assets, and usually can highlight small tweaks you can make to increase the chance of making your portfolio last as long as you do.
Now, one of the primary drivers of that comprehensive plan is cash flow. And getting your hands around cash flow is one of the most critical action steps you can take.
There are automated cash flow trackers, like Quicken, or Mint, or one of those- we have one here we use with clients. But it doesn’t have to be that fancy. You can simply gather the last 12 months of bank and credit card statements to total up what you have spent. You categorize these items and do the best you can to estimate large expenditures that don’t happen all the time. Like home improvements, new cars, etc. You can do that from scratch on paper, or an excel spreadsheet, or look around the internet for a budget template. Can’t find one? Email me and ask for one and I’ll send one to you for free.
Once you have a clear picture of your spending, look at areas where that can be improved. Whether that’s increasing income or decreasing spending, or a combination of both. Here are some ideas that can move the needle in your favor on the income side:
- This one might seem obvious, but it’s important nevertheless—unemployment benefits! These benefits can be substantial, especially in times of great economic unrest when stimulus programs may increase those benefits in size and duration.
- Part-time income—whether for cash flow needs or simply for more life satisfaction, retirees have turned to part-time employment in their retired years. As I mentioned in a previous video “Get a Great Part-Time Job in Retirement” the Bureau of Labor Statistics showed that more than half of people age 60-64 are working in some capacity and almost a third of people ages 65-69 are too1. Find something that helps pass the time and pay the bills at the same time. I highly encourage you to check out that video for some great ideas there.
- Don’t have a pension? Consider setting up an annuity for some of your assets. Annuities are one of the few types of investments that can provide you income that you can never outlive. They may also let you take more income than you might take from your portfolio otherwise, for fear of running out of money. Now, annuities are complex instruments and you need to be sure you know what you’re signing up for before pulling the trigger. You may want to check out my other video “3 Questions You Must Answer Before Buying an Annuity” for more info there.
- Social Security— Whether now is the best time to claim is absolutely worth careful analysis. It is a key piece of the income puzzle, and so being sure your plan takes special attention to optimizing it is critical.
So, before turning on the income spigot, it is critical that you take advantage of where you sit along on the income spectrum. My most previous video “How to Reduce Taxes on Retirement Withdrawals!” has some very important points in there, one of which deals with health insurance. Don’t just blindly take your employer’s COBRA plan if you’re laid off. With your lowered income, you may be eligible to get substantial health insurance subsidies that could save you thousands of dollars in premiums.
So again, it’s another reason why a comprehensive plan, looking at all factors, including long-term cash flow can be so helpful. It’s also why you may want to find a qualified financial planner who has not just the expertise, but also the specialized software to help you navigate these big decisions.
OK, let’s go back to cash flow, this time on the spending side. What can be done to quickly and sharply drop expenses?
- Debts—what kind of debts do you carry? Sometimes, you may have debt that has a relatively low balance but a high required monthly payment. Either way, it’s certainly worth reevaluating your debts to look for high-interest loans, credit cards, etc. and knocking those down where possible.
- Your home – how flexible are you in where you live? You may not want to do so immediately, but perhaps you can incorporate into your plan a future downsize or a relocation to a lower-cost state. It’s amazing how much difference can be made to the viability of your plan simply by relocating.
Take a look at this cost of living index by state on worldpopulationreview.com2. This index shows a percentage comparison of cost of living between states. So a state with an index of 120 has 20% higher average costs than one with 100. Now obviously, if you move from Hawaii (192.9) to Mississippi (86.1), you’re going to experience a much different lifestyle. But you may not be ready for that dramatic of a change. But, in NY where I live, for example, the index is 139.1. If I had to retire early, might I be willing to move to neighboring VT at 114.5? Or income tax-free NH at 109.7? Maybe I’d like to be done with the nasty winters and move to FL at 97.9. A change like this can have a dramatic impact on your ability to afford retirement.
- Finally, look closer at the cash flow and what you’re spending to keep yourself entertained. Research hobbies that you can do that don’t cost so much. Get involved with your local library or theater group. Maybe you’ve always wanted to do some volunteering. You won’t earn much money, but it’s also something that can keep your mind engaged and doesn’t drain your bank account at the same time. These kinds of adjustments can really help the long-term viability of your portfolio.
Lastly, be sure your portfolio is ready to switch from accumulation to distribution. I have numerous videos about things to consider when reallocating your portfolio, though the specifics on how you’ll do this will be based on your withdrawal timetable. One of the most critical elements though is to be sure you have sufficient funds that are not subject to market risk to cover your needs over at least the first 1-3 years.
If you have the dumb luck of being forced into early retirement at the same time of a stock market drop, it can spell trouble long-term. The very first few years of retirement, whether you planned them to be or not, are often the most critical in determining how long your portfolio will last. Retiring and taking those initial withdrawals in a down market, can leave your portfolio with insufficient funds to bounce back when the market turns around. This is one of the major reasons why it’s so important to have low-risk funds available for assets that you intend to withdraw over that short-term.
So, who can help you with this stuff? I can! Come visit me at www.retirementtheory.com or send me an email at email@example.com. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning.