We all know the importance of planning when it comes to achieving retirement success.
But what, exactly, should you plan for?
Today, we’re boiling it down to the three questions you must answer before you retire.
Answer all three correctly, and you’ll be well on your way to retirement success.
Sounds easy, right??
Hold that thought. Done right, it will take you some time to work through what initially seems to be an easy homework assignment. Take your time.
Your retirement success depends on it.
Today, 3 questions you should answer before you make the decision to retire. Share on X
Once upon a time, I had a boss who was really, really good at asking questions.
We all knew if we were making a presentation, we’d better be prepared for the barrage of questions to follow. She had an innate ability to drill down to the issues that truly mattered. It was something we all noticed, and a skill few of us possess.
To help those of you who struggle with asking the right questions, today I’ll present the top 3 questions you need to answer as you prepare for retirement.
Like my old boss, if you answer these correctly, you’ll know you’re tackling the issues that really matter.
Question 1: Do You Have A Reliable Cash Flow Plan?
No one wants to spend their retirement worrying about money.
To minimize that concern in retirement, it’s important to do some math on the front end. While many questions about retirement are difficult to answer, getting a handle on your expenses and income isn’t too difficult.
Time-consuming, yes. But worth every minute.
In short, developing a cash flow plan requires you to estimate your retirement spending and income, ensuring you have sufficient income to cover your expenses over the duration of your retirement.
In our case, we tracked every dime we spent for a year, then made adjustments to reflect how we expected our spending would change post-retirement (downsizing, more travel, etc.). In reality, getting an estimate for your retirement spending is one of the easier tasks in retirement planning, and yet many folks “take a swag” instead of spending the time required to build a solid “bottom-up” forecast. For details on how I did this as I was planning for retirement (including screenshots of my spreadsheets), check out “When Can I Retire? (Step 1 – Spending).”
On the income side, it’s essential to quantify all your expected income sources and develop a strategy for when to claim Social Security. You’ll need to adopt an Annual Financial Review to ensure your investment withdrawals follow a methodology to stay within the limits of How Much You Can Safely Spend in Retirement. To see how I developed our Retirement Income Plan, check out “When Can I Retire? (Step 2 – Income)”.
Once you’ve mapped out the macro numbers, it’s important to develop a Drawdown Strategy. Which accounts will you draw from first? How will you build A Retirement Paycheck? Are you planning to do Roth Conversions? How will you build cash buffers to avoid overreacting in the next bear market?
Finally, it’s important that you lay out your cash flow plan over the duration of your retirement.
In our case, I did it both in a spreadsheet and by using the software from Boldin (Affiliate link), a tool I recommend for anyone approaching retirement and concerned about making their money last through their lifetime. Using both methods, I projected our retirement cash flow to age 95 to give confidence that we wouldn’t outlive our money.
For a detailed Case Study that utilized this approach, check out “From Food Stamps To FIRE – A Case Study on Retirement Planning.”
Yes, answering Question 1 will require a significant amount of time.
Having been through it myself, I can assure you that your peace of mind in retirement is worth it.
Question 2: Have You Accounted for Healthcare and Unexpected Costs?
It’s never good when you need to replace your HVAC system unexpectedly, and yet unexpected costs are a reality of life. How do we address these in our plan for retirement success? Consider each of the following unexpected costs, and build them into your cashflow plan:
a) Healthcare Costs: If you’re retiring before age 65, how are you going to cover your healthcare costs? Since we retired at age 55, we built in a hefty cushion in our spending estimate ($2,500/month, inflating at 5% annually) to cover our private health insurance. Fortunately, our costs have come in below that level, and we’re pleased to have a “surprise to the good” instead of the other way around. Don’t forget to capture the expense of funding your HSA each year, if eligible (you must discontinue HSA contributions six months before applying to enroll in Medicare). If you’re retiring at age 65 or later, how will you decide on which Medicare plan you should use? I recommend using Chapter (Affiliate link) to help you choose “The Best Medicare Plan For You”. Healthcare costs are expensive, and it’s critical to ensure they are accurately reflected in your cash flow model.
b) Taxes: Remember those Roth conversions you were considering? Don’t forget that the incremental tax associated with those conversions needs to be accounted for, ideally using money from your taxable/brokerage accounts to maximize the money you’re able to convert (it’s surprising how expensive this can be). For many, you’ll be making Quarterly Estimated Tax payments for the first time in your life, and you’ll get penalized if you underpay. Talk with your CPA to ensure you get it right, or use the Safe Harbor Rule when establishing those quarterly payments.
c) Car Replacement & Maintenance Items: You’ve always had an emergency fund when you were working, right? How do we modify that strategy in retirement? In our case, I took a tip from the WSJ Complete Retirement Guidebook (Amazon Affiliate link) to determine a reasonable annual amount to set aside for unexpected emergencies, as summarized below:
Every year, we divert the first $12k of our Safe Withdrawal Rate to a standalone “Retirement Reserves” account in Capital One. In the event any “unexpected” expenses come up during the year, we simply transfer money from that fund to our checking account to cover the bill. So far, so good, and we’ve been fortunate that the reserve has been sufficient to meet any unexpected expenses through the first 7 years of our retirement.
d) Family Assistance / Charity: Do you have parents or a child who may need your financial assistance during your retirement? Don’t naively assume they’ll be fine and exclude them from your cash flow plan. If there’s any possibility that you’ll be supporting someone you love, build it into your numbers. If they don’t need it, you’ll have a surprise to the good, and that always beats the alternative. Consider helping your children when they need it most, rather than making them wait for an inheritance. It’s rewarding to see your children benefit from a much-needed boost, but also a delicate balance of independence vs. entitlement. Think about what you want to do, and build in some buffer to allow yourself to help someone in need. The same goes for charities. Are you planning on tithing in retirement? Is there a charity you’d like to help with ongoing support? Build it into your numbers.
e) Inflation: Way back in 2019, I wrote Inflation: The Silent Killer of Retirement. Inflation had been tame for years when I wrote that article, but it didn’t stay that way. When you lay out your cash flow to age 95, add in an inflation adjustment by category to ensure you’re factoring it into your plans over time. Make sure your portfolio is properly diversified and includes Investment Options To Protect Against Inflation. Finally, make sure your spending estimate includes some discretionary spending that you can cut back on for a few years in the event of stagflation, or below-market returns combined with above-average inflation.
f) Long Term Care Expenses: We all face the risk of LTC expenses, and the only options we have to mitigate that risk are to either buy LTC insurance or choose to self-insure (note: if you don’t make a decision, you ARE choosing to self-insure). If you’ve decided to buy insurance, it’s simple to capture those in your cash flow model. Self-insurance is less obvious. If you’d like to capture this expense, I’d suggest you consider subtracting the present value of your future LTC costs from your Net Worth when calculating your Safe Withdrawal rate. Alternatively, you could hold investments to cover your potential LTC costs in a separate account, then exclude those when calculating your SWR. Either way, make sure you’ve thought about your risk of LTC expenses and factored them into your plan.
A recent Freedom For Fido fence build (I’m 2nd from L, my wife is in the green sweatshirt).
Question 3: How Will You Spend Your Time And Stay Fulfilled?
A common mistake many folks make when planning for retirement is to focus primarily on the financial issues. Money is “only” a tool, and most folks find that achieving their financial goal doesn’t, in and of itself, lead to happiness in life (did you know retirement increases the probability of depression by 40%?). Your challenge, as you approach retirement, is to decide what type of life you want to build for yourself in retirement, then use your financial resources to help you achieve the life that brings true contentment.
Successful retirees have learned that the non-financial elements are critically important and should be addressed with the same rigor as the financial elements. When you retire, you’re not only losing your paycheck. You’re also losing the following benefits from work, and you WILL struggle if you haven’t considered how you’ll replace them:
Purpose
Structure
Identity
Relationships
Achievement
As I was approaching retirement, I was curious why some retirees had a smooth transition, whereas others struggled (only 32% of retirees reported a smooth transition). Based on my research, I discovered the most significant differentiators between happy vs. unhappy retirees. There is a direct correlation between how much planning a person does before retirement (including the non-financial elements) and the resulting transition. The more time you spend thinking about the non-financial elements, the smoother your transition will be.
I’ve written dozens of articles on the topic, and it’s the primary focus of my book. I struggle to boil the entire topic down to a summary, so I’ve decided to include a bullet list of relevant articles. If you take nothing else away from this article, please recognize the importance of answering Question 3 before you retire.
Your homework assignment: Pick at least two of the following articles and read them as you prepare to answer this critical question for yourself:
Conclusion
In summary, the three questions you must answer before you choose to retire:
1) Do You Have A Reliable Cash Flow Plan?
2) Have You Accounted for Healthcare and Unexpected Costs?
3) How Will You Spend Your Time And Stay Fulfilled?
Will these three questions really determine 99% of your retirement success? Who knows (it did catch your attention, though, right?). Regardless of the actual percentage, there’s no doubt in my mind that these are the right questions to ask as you approach retirement (I think my old boss would be proud 😉).
More important than the questions are your answers. If you’re not comfortable answering them yourself, this is one area where it pays to hire an expert to help.
Spend the necessary time to answer the questions well.
Your retirement success is riding on it.
Your Turn: If you’re already retired, what other question would you encourage a soon-to-be retiree to ask themself? In hindsight, which of these questions are most important? If you’re not yet retired, which question concerns you the most? Let’s chat in the comments…
