What Are the Two Questions the Retiree Must Answer Before They Retire?

The two biggest things to consider before retiring for a retiree are:

1. How much money they have

2. How much money they’ll need

When a financial advisor is working on helping clients retire, getting into the specifics of these two areas will likely be a main focus that most of the retirement questions for financial advisors relate to. When helping someone think through a question like “what are the signs that you should retire”, looking at how much money they have versus how much they will need can help give a clearer answer.

In this article, we’ll explore each of these questions in more depth, including:

• What factors contribute to the answers for each question?
• What types of financial things to do before retirement to help someone prepare?

What Questions to Ask Before Retiring: Savings

When someone starts thinking about retirement, they immediately wonder how much money they need to have in savings and retirement benefits. A great starting place is to create a list of all the financial assets they have. This will provide clients with a full picture of their current situation. 

Many people think about the money they have available for retirement as just how much is in their savings account and 401(K). But there are other financial assets that may also exist, so it’s important to go through as complete a list as possible to account for anything that could otherwise be missed. 

Financial assets to record include:

• Checking and current accounts
• Savings accounts
• 401(K) retirement accounts
• 403(b) retirement accounts (if applicable)
• Pension plans
• IRAs (both Roth and Traditional)
• Social Security Income (either now or predicted in the future)
• Stock and bond investments
• Real estate investments
• Other personal assets, like your house, cars, and other high-value items

If the person planning their retirement is still several years from retiring, it is also important to estimate how much money they are still paying into any retirement plans or investments. This way, the value of these accounts can be calculated based on when they plan to retire.

What Questions to Ask Before You Retire: Expenses

The money someone has for retirement is only half the picture. Some of the most important questions to ask about retirement are around estimating how much money someone will spend. There are many recommendations for how to come up with a general estimate of how much someone can expect to spend in retirement. One of the most common is the 80% rule, which says you can expect to spend around 80% of your pre-retirement earnings annually after retirement. So if you earn $50,000/year working, you would expect to spend $40,000/year when retired.

This can be a good jumping-off point when thinking about retirement planning, but this rule doesn’t work for every individual. It’s helpful to think about your specific needs and lifestyle to come up with an estimate that’s more specific to your situation.

Creating a list of anticipated expenses in retirement is a useful exercise. Important categories include:

• Housing
• Utilities
• Medical care
• Food
• Entertainment
• Other monthly expenses, like insurance and life insurance payments

In this way, someone planning for retirement can come up with a more accurate idea of their projected expenses in retirement. 

It can be challenging to estimate exactly how each of these expense categories might change after retirement. Here are some useful consumer trends from the Bureau of Labor Statistics on how expenditures change between age groups in some of these categories. 

When thinking about predicting specific expenses for an individual, the main takeaways are that housing costs go down, medical expenses go up, and food and entertainment spending stay similar.

What Happens When Income and Expenses Don’t Match for Retirement Planning?

For some people working on planning their retirement, the money they have available for their retirement won’t match their projected expenses. There are many possible solutions to this mismatch, including:

• Delay retirement or continue working part-time, so there are fewer years without a salary
• Increase the amount being saved or invested
• Reduce expected retirement expenses
• Generate more savings by selling unneeded assets

If someone planning to retire has an unneeded life insurance policy, their monthly payments are adding an expense without giving them benefits. Selling their life insurance policy (called a life settlement) could be a useful option as part of their retirement planning strategy for two main reasons:

1. They no longer incur the monthly expense
2. They can get a lump sum payment for their existing plan

A life settlement, in general, will pay out 10-25% of the death benefit as a lump sum that can go toward someone’s retirement savings goals. So if you have a life insurance policy with coverage of $1 million, you could expect to sell it for up to $250,000. For more information on if life settlements are a good option, contact Life Settlement Advisors or submit a case.

Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

I am always happy to answer any and all questions about these life-transforming transactions.