But here’s the thing. If you’re counting on any one of these three things in retirement – and they don’t play out – it’ll negatively impact your retirement.
So, in this video, we’ll go over each of these retirement expectations, discuss why they rarely play out the way that retirees think, and how to plan your retirement to avoid these common pitfalls.
But first, let me show you an example of one of these common retirement expectations – and how things play out when it doesn’t happen.
Working In Retirement
Bill and Jane are 62 and have around $1 million saved for retirement. If they start their Social Security benefits right now, they’ll have around $4,000 per month coming in.
They expect their after-tax living expenses to be about $10,000 per month, including housing and healthcare.
If they retire right now, they start out with an 6.4% withdrawal rate. Given this, their initial probability of not having to adjust their lifestyle in retirement comes in at 42%.
That’s maybe a little lower that you’d want. I typically like to see my clients somewhere between 70% and 90%.
But Bill and Jane are getting a little sick of working – AND they don’t want to cut back on their retirement spending goals. So, they wonder… what would things look like if they worked a part time job until they turned 65?
So, assuming they each earned around $50,000 per year on a part-time basis over the next three years, how do things look?
That extra income makes a huge difference, taking their Monte Carlo odds from 42% to 75% and their initial withdrawal rate between now and age 65 is essentially zero.
That’s a completely acceptable number in my opinion.
But here’s where reality may bite them in the behind.
According to the recent Employee Benefit Research Institute study, people tend NOT to work after retirement. Where almost 75% of retirees expect to work in some capacity, only around 30% actually do.
So, what happens to Bill and Jane if their part-time work plan falls through?
Let’s say that, between the two of them, they’re only able to take home $40,000 per year over the first three years of retirement. In this case, their Monte Carlo probability of not having to adjust their lifestyle in retirement drops to 59%.
It’s not a five-alarm fire, but they’ve certainly brought the possibility of running out of money into play.
So, how do you keep from letting the post-retirement work trap from punching holes in your financial plan?
Well, the first thing that I’d do is to assume the worst (or assume the best?) and see what your plan looks like with no post-retirement income.
If your plan still falls in that comfort zone, then you’re good-to-go. If something happens where you can’t find the right amount of income – or any income for that matter – things will still be just fine.
If you find that your plan starts to look a little sketchy without any post-retirement income, then it may be a good idea to push that retirement date back a little bit.
In the case of Bill and Jane, if they push their retirement back from age 62 to age 64 – and plan NOT to work after age 64 – their Monte Carlo probability jumps up to 81%. So, even a couple of years can make a huge difference.
Not to mention, they can stay on COBRA until they’re eligible for Medicare.
Now that we’ve seen how one retirement expectation – working after retirement – can hurt your financial plan if things play out like they do in the real world, let’s talk about another retirement expectation that tends to… not play out like everything thinks.
Early Retirement
Let’s go back and revisit our friends Bill and Jane. In this case, their original plan is to retire at 65. In this instance, their initial withdrawal rate comes in at 4.4% and their Monte Carlo probability of not having to adjust their lifestyle comes in at 91%
That’s a very solid financial plan.
But here’s where another of the surprising findings from this study come into play.
According to the study, people tend to retire earlier than they expect. In fact, they tend to retire THREE YEARS earlier, on average. Where the median expected retirement age is 65, the median ACTUAL retirement age is 62.
So, what happens if both Bill and Jane either choose (or are forced) to retire three years earlier than they’d planned?
Well, we’re back in our original scenario where they start with a 6.4% withdrawal rate and a 42% probability of not having to adjust their lifestyle.
They end up going from a very healthy plan at 65 – one where I would encourage them to think about spending a little more – to a plan where they will most likely have to pare back their spending quite a bit to make things work.
So, how can you keep this retirement curveball from taking you out?
It’s always a good practice to run your numbers to see what things look like if you retire a few years ahead of schedule, keeping in mind that you may be like most people and retire before you’d planned.
In many cases, whether it’s downsizing or health issues, retirement isn’t a choice. In that case, you still have the power to adjust your plan, your spending, and your investment mix to improvise based on your circumstances.
The important thing to keep in mind is that, if you’re off on your retirement date, it’ll probably be on the early side.
And this brings me to our final retirement expectation that MAY NOT play out like we think.
Retirement Comes at You Fast
Jeff is in is mid 50s and is a partner at a law firm in a big city. And while he’s done very well, most people don’t realize that 50 billable hours per weeks isn’t just 50 hours of work.
There’s no way he can keep this up for another ten years.
So, part of his plan, Jeff expects to start slowing down in a couple of years. His plan is to gradually reduce his hours, mentor the younger partners in the firm, and bring in new business until he’s ready to fully retire.
But, as it turns out, the glide-path retirement is a rarity. In fact, it ends up being a cliff rather than a smooth off-ramp.
Where roughly half of workers are expecting a gradual transition from full-time work to retirement, in actuality, 73% of the study respondents had a full-stop retirement – and only 19% were able to pull of the glide path.
So, how do you avoid the glide-path blues?
Again, I would play this the same manner as someone who expects to work after retirement. If you plan for a full-stop retirement and you’re still in great shape, then any slow-down before a full retirement that you can pull off would be icing on the cake.
But if your plan depends on the glide-path, then it may be time to adjust.
If you’re relying on one of these in your retirement and would like a second opinion, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.
