Planning Ahead: Deciding the Ideal Time for Your Retirement

There is no one-size-fits-all approach to retirement planning. The road leading to this significant life transition is as unique as the individuals journeying on it, and the choice of when to retire can often feel confusing and overwhelming. This is because, in essence, retirement isn’t just about choosing when to leave the workforce—it’s about deciding when to embark on an entirely new chapter of your life. 

In our blog, “Planning Ahead: Deciding the Ideal Time for Your Retirement,” we’ll discuss various factors that could influence your retirement planning:

• Can you retire early or wait until you reach age 65 (or older)?
• Understanding the retirement “risk zone”
• How a Buffalo Grove retirement planner can help you pursue your retirement goals. 

It’s important to remember that retirement planning is not merely about money—it’s also about being mentally and emotionally prepared for a significant shift in lifestyle and routine.

It’s never too early—or too late—to start planning for your future!

Starting to plan for your retirement?  Read our latest Quick Guide: Retirement Planning in Buffalo Grove.  

Can you retire early or wait until you reach age 65 (or older)?

Many factors should be used to determine when you can retire. A common rule of thumb is the “25x Rule” (or the 4% Rule), which suggests saving 25 times your annual expenses to retire comfortably.

For example, if you estimate your annual living expenses in retirement will be $100,000, you should aim to have $2,500,000 ($100,000 x 25) in your retirement savings by the time you retire. Note the $100,000 is your income requirement after considering the impact of Social Security. The $2,500,000 assets reside in your IRAs and personal savings accounts. 

Another way to determine your retirement needs is to base it on your pre-retirement income and cost of living. In this scenario, you will need at least 70% of your pre-retirement income annually during your initial retirement years. For example, using this guideline, if you live on $100,000 per year, you should aim for $70,000 per year of retirement income. If all the $70,000 of income comes from savings, you need $1,750,000 of assets to fund that lifestyle.

Also, remember the impact of inflation and potential medical expenses as you age, which could be significant. A Buffalo Grove financial advisor can help you with these calculations and considerations.

Here are some steps to help you determine your retirement income needs:

1. Assess Your Savings and Investments: You should consider your retirement accounts, such as 401(k)s, IRAs, personal savings, and other investments. If you’re nearing retirement age, your savings should be enough to cover your cost of living with a cushion and no part-time work.
2. Determine Your Expected Expenses: Consider how your spending might change once you retire. Some expenses may go down (like commuting costs), but others may go up (like travel and health care).
3. Consider Your Expected Lifespan and Overall Health: With people living longer due to advances in healthcare, you need to consider how long your retirement savings will need to last. As you age, you should also consider the potential need for increased medical care.
4. Look at Social Security Benefits: Understand your expected Social Security benefits based on when you opt to begin taking these benefits. This can also supplement your income in retirement.
5. Think About What You Want to Do in Retirement: If you plan to travel or take up new hobbies, you must budget for these activities.

How SGL Financial Can Help: At SGL Financial, your priorities are at the heart of our services. We see our job as asking tough but important questions about your financial concerns, aspirations, and needs. Without this mutual understanding, your ability to pursue your financial goals may be at risk. We adopt a forward-looking approach to circumvent potential obstacles so you have a more straightforward path toward pursuing your goals. And we are always looking for ways to fine-tune your retirement strategy to ensure we provide you with a high level of service. 

Understanding the retirement “risk zone”

The “retirement risk zone” or “red zone” is often used in retirement planning to describe when an individual is about to retire or has just retired. This typically spans 5-10 years before and after a retirement date. During this period, a retiree’s financial assets are at their peak, which means more money is vulnerable to market downturns, and poor investment returns can significantly impact retirement assets.

Retiring during a market downturn year and withdrawing assets from retirement accounts when the markets are down can accelerate the depletion of your savings accounts much faster than more normal years.

People within 5-10 years of retirement may want to move some or all of their retirement savings away from riskier investments (like growth stocks) towards more stable investments (like short-term bonds and fixed annuities) to protect their principal against market volatility. However, this transition should be managed carefully to ensure you do not fall into the trap of buying high and selling low. 

Therefore, to manage the risks in the retirement risk zone, individuals are generally advised to:

1. Build a one-year buffer: Maintain a cash buffer that can help cover living expenses during market downturns so you don’t have to sell assets at a lower price.
2. Diversify your portfolio: Spreading investments across different asset classes (stocks, bonds, cash equivalents) can help to mitigate the risk of concentrated underperforming investments that undermine the performance of your retirement assets. 
3. Adjust your withdrawal rate: If the markets are performing poorly, consider temporarily reducing your withdrawal rate until the markets recover.
4. Develop a dynamic spending strategy: Be flexible with your spending in retirement. In years when your portfolio is doing well, you might spend a bit more; in years when it’s performing poorly, you may want to reduce your distributions.
5. Consider an alternative investment: Purchasing an annuity can provide a steady income stream regardless of market conditions.  

The retirement risk zone can be stressful as individuals transition to retirement during market volatility. By understanding the risks involved and taking steps to mitigate them, individuals can increase their chances of a financially secure retirement later in life.

Why Consider SGL Financial? Planning for retirement should be a joy, not a burden. At SGL Financial, we have a dedicated team of retirement planning professionals committed to helping you pursue your golden years, whether you’re just starting to save or already enjoying your retirement years. Our experienced financial advisors are adept at analyzing your retirement income, expenses, and lifestyle to develop a personalized strategy that can work for you.

Our team has access to advanced financial planning software and the latest technology, allowing us to provide tailored solutions to suit your unique goals and circumstances. We offer a diverse range of services, including retirement income planning, investment management, estate planning, tax planning, and risk management, among others.

Now is always a good time to start planning for your future. Whether you have questions, need a fresh perspective, or simply want a second opinion, we are here to guide and support you. We invite you to take the first step towards a secure and enjoyable retirement by scheduling a consultation with an SGL Financial advisor today.