Conduct a Dress Rehearsal before Retiring

Two emotions are likely to strike those who are nearing retirement – excitement and fear. Leaving the world of alarm clocks and cubicles and having time to pursue your own passions on a daily basis is liberating – but the apprehension of entering a new life stage can easily creep in. Although work-related stress will disappear, the responsibility of filling each week in a satisfying way can be a challenge. Top that off with the ever-present concern about long-term financial security in retirement and the nerves can grow even greater.

The truth is, feeling excitement and fear is okay, but what if your retirement isn’t everything you envisioned it to be before you left the workforce? What if life after work turns out to be far different from your expectations?

Consider a practice run

If you’re nearing retirement, you’ve likely taken steps to prepare financially for the future. But there’s one important thing you might not have considered adding to your pre-retirement checklist – a practice run. How you choose to spend your time (and in many cases, your money) in retirement is your decision to make, but it’s not always an easy one. As we age, our interests, hobbies and relationships change. What you may consider your “ideal” retirement when you’re 55 may not fit when you’re 65. This evolution can make it hard to plan accurately for retirement.

To the extent you’ve made a financial commitment to a certain lifestyle, this can pose real problems. If you’ve already committed a significant amount of savings toward a particular lifestyle (a home in another part of the country or a trip around the world for a year), changing your mind in ten or fifteen years could throw a wrench in your long-term financial plan.

Those who have based their financial plan for retirement on the idea that they will be living in a new location may benefit from a practice run before making the big move. It’s natural to change your mind about what you want, but it’s better to understand the potential implications of changing your mind before you actually retire as it can have unintended consequences.

For example, consider an individual who has lived his entire life in New York, but moves to Florida when he retires – where taxes and cost-of-living are generally lower. Deciding after several years to relocate back to New York to be near family – where cost of living and tax rates differ – can mean the dollars he’s saved will have to be re-allocated and his savings may not go as far as he’d planned.

The idea of practicing retirement may also mean leaving the 40-hour work week for something that’s more part-time. Some people may want to take a part-time role with their current employer, or work as a consultant to continue experiencing the challenge of work. This also can offer important financial benefits that help preserve their nest egg.

Time for a financial rehearsal

Practice can also be beneficial in another way – simulating how to manage your expenses in retirement. The idea that your cash flow no longer comes from a reliable paycheck, but from other sources like Social Security and personal savings can come as a shock – even to those who are well-prepared for this change.

One idea to accomplish this is to run two accounts for a certain period of time. Through one account, manage all of your household and lifestyle expenses that you expect during retirement. This includes the costs for necessities like food, clothing, shelter, utilities, taxes and insurance as well as “nice- to-have” items like dining out, traveling, etc.  

Keep in mind that you may have to estimate or inflate your lifestyle expenses for retirement as they could rise when you have more free time. The best way to get a handle on these expenses is to experience them while you’re still working. Take that trip to Europe before retirement and find out first-hand what you can do within your budget. If the cost is different than expected, make adjustments to your financial projections to more accurately reflect reality.

Through the second account, manage all of your expenses that are expected to end in retirement like principal and interest on a mortgage payment (if your home will be paid off), current car payments (although car payments can certainly happen again in retirement), college costs for your kids and contributions to retirement plans.

Perfecting life in retirement

A little practice can go a long way toward easing emotional and financial concerns when it comes to making the jump into retirement. A retirement trial run may not answer all of your questions – and it doesn’t necessarily include the unexpected events that can often throw retirement off track – but doing it for six months or so can be very beneficial in determining if your budget and lifestyle expectations for retirement are realistic. Consider working with a financial advisor who can help you determine a budget and a retirement income plan that fits your needs and desires for retirement.

 Jeff Mushen, MSF, CFP, ChFC, is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner ™ with Ameriprise Financial Services, Inc. in Edmonds, WA.  He specializes in fee-based financial planning and asset management strategies and has been in practice for seven years. To contact him, www.ameripriseadvisors.com/jeffrey.m.mushen.

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