Can I retire?
That’s the question thousands of Oklahomans will ask this year. You may find yourself like a lot of other Oklahomans — finding it difficult to answer this question and determine if you can retire. The core of the challenge is that it is difficult to know what you might spend in retirement.
Before you tackle the “can I retire?” question, there may be some better questions you should be asking first:
1. Should I retire?
Let’s assume you have enough money to retire – does that mean you should automatically retire? The research shows that many people may be better off continuing to work. A Harvard study in 2018 showed that working longer not only has financial benefits, but also mental and social benefits. Some data suggest working longer can increase your physical health and longevity. 1
Working longer is especially helpful if you enjoy your work and/or find a sense of purpose from it. So the first thing you should ask before retiring is, “Do I want to retire?”
2. Am I prepared to live a long life?
Did you know that a healthy, non-smoking married couple of age 65 has almost a 50% likelihood that one spouse will live to age 95? 2 Many people far underestimate how long they will live, which can be a critical mistake in making smart investment decisions.
There’s a reason for this miscalculation – we confuse our life expectancy with that of our parents and grandparents. During the 1960s, 1970s, and part of the 1980s, it wasn’t uncommon for a 65-year-old worker to retire and have a pension plan that would pay a guaranteed annuity for the rest of their life.
This is no longer common for two reasons.
- People are living longer so companies can’t afford to pay a lifetime annuity – otherwise, the company would go bankrupt. People are living longer generally than they did 40 years ago.
- Companies have shifted to putting the responsibility of retirement on the worker rather than the employer.
So, make sure you consider the possibility of living a long life.
3. Have I factored in the inevitable rising costs of inflation?
Inflation has indeed become a bigger concern in the last couple of years, but many people still don’t realize how much inflation will impact their ability to retire.
Let’s be clear – no one knows what inflation will be in the future, but you may find it sensible to use a historical inflation rate of 2.95%. Using this simple logic, you can expect your costs to double about every 24 years.
The most important thing to do here is to include an inflation projection in your future spending. The thing about inflation is that you will need more income in the future even if your lifestyle and spending remain the same. Make sure you include inflation as part of your projected expense needs. You will indeed be guessing on how much inflation will happen, but an educated guess is better than ignoring it.
4. What will I do when I retire? What will I retire to?
Have you taken time to think about what you will do with your time when you’re not working at your current job? Former Notre Dame football coach, Lou Holtz created a bucket list of 107 things he wanted to do in his life. He broke them into five categories:
- Things he wanted to achieve as a husband and family member.
- Things he wanted to achieve spiritually.
- Things he wanted to achieve professionally.
- Things he wanted to achieve financially.
- Things he wanted to do purely for excitement. 3
The key here is to be intentional and specific about what you will do with your time and the rest of your life (which may be many years!). Consider writing down your own bucket list and make sure you involve your spouse if you are married. Have fun with this!
5. Where will I live?
Oklahoma has one of the lowest costs of living in the country. 4 It is also a fairly low state tax, which is favorable for retirees. One nice benefit is that there is no state tax on Social Security benefits. Additionally, you may be exempt up to $10,000 of annual retirement income. 5
If you plan to move to a different state, make sure you understand the cost of living and state tax impact difference. Make sure you pay attention to housing costs in other states since it’s likely you’ll pay more for housing outside of the Sooner state.
6. How should I invest during retirement?
While investing can be complicated, determining your needed rate of return is simple. Don’t overcomplicate this part. Focus on investing in asset classes that will provide the investment returns needed to offset your spending rate.
For instance, let’s assume you need $3,600 to cover your living expenses. Let’s also assume you are receiving $2,000 from Social Security retirement benefits. This means you have a gap of $1,600 in monthly income.
If you have $400,000 in retirement accounts, you can calculate that you need to generate at least a 4% return to meet the $1,600 gap. Of course – don’t forget about inflation!
Let’s take the historical rate of an expected 3% annual inflation rate. This means you actually need to generate an annualized average return of 7% to cover the 4% income needs as well as the expected inflation rate.
A broadly diversified portfolio of stocks should serve as the foundation for most retirees’ investment plans. Since 1926, US stocks have provided almost 10% annualized returns. 6 Bonds also have a role with many retirees as they can stabilize the fluctuations of stocks, although bonds have a lower expected return. With the help of a financial planner, you should be able to determine the appropriate mix of investments for your retirement investment plan.
7. What if I find I can’t retire yet?
So what do you do if your return number doesn’t meet your need? You go back to the drawing board and craft a retirement savings plan. This plan may include moving back your retirement date, lowering your expected expenses, or increasing your retirement savings.
The most important thing for you to do right now is to start planning now. We would all be wise to heed what Dwight Eisenhower was quoted as saying, “… Plans are useless, but planning is indispensable.” 7
Sources:
- https://www.hsph.harvard.edu/nutritionsource/healthy-longevity/
- https://www.wsj.com/articles/death-finances-and-how-many-of-us-get-our-money-needs-wrong-51a660a2?ns=prod/accounts-wsj
- https://coachhuey.com/thread/5410/lou-holtz-107-goals
- https://meric.mo.gov/data/cost-living-data-series
- https://www.kiplinger.com/state-by-state-guide-taxes/oklahoma
- https://www.nerdwallet.com/article/investing/average-stock-market-return
- https://www.rainmakervt.com/blog/plans-are-useless-but-planning-is-indispensable/
The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.
