Why Taking a Test Drive Before Retirement is Essential
Introduction:
Before making any major purchase, such as a car or a house, it is customary to take it for a test drive to ensure it meets your expectations. The same principle applies to retirement planning. It is crucial to test drive your retirement plans to ensure they align with your expectations and financial capabilities.
Determining Realistic Expectations:
Retirement is an expensive endeavor, often surpassing the costs of purchasing a car or a house. Therefore, it is important to assess whether your expectations for retirement are realistic. While you may have a general understanding of what you will need, taking a test drive will provide a more accurate picture. Without prior retirement experience, it is impossible to be certain about your plans until you give them a realistic trial run. This is especially beneficial for individuals aspiring to retire early.
Avoiding Excessive Free Time:
One common struggle among retirees is finding themselves with an abundance of free time. After completing a few trips and finishing long-awaited projects, many retirees find themselves at a loss for what to do next. According to First Citizens, 60 percent of seniors desire to travel after retirement. However, eventually, the novelty wears off and retirees may find themselves in need of activities to fill their time. This often leads to taking on part-time jobs or volunteering opportunities. The only way to truly comprehend this aspect of retirement is by experiencing it firsthand.
The Importance of Financial Test Drives:
Perhaps the most significant reason for taking a test drive before retirement is to determine whether you can live within the financial means you have saved for retirement. Using a retirement calculator, you can estimate your expected income during retirement. Additionally, calculating your projected expenses and dividing them by 12 will give you a monthly budget estimate. It is important to factor in an annual inflation rate of approximately 3.2 percent. Furthermore, it is crucial to consider potential changes in Social Security benefits. CBS reports that if Congress fails to act by 2034, Social Security benefits may be reduced by up to 20 percent.
Estimating Lifespan and Expenses:
Many individuals struggle to determine the required funds for a comfortable retirement due to uncertainty about their lifespan. In the United States, the average lifespan is approximately 79.25 years, with men generally living slightly less and women living slightly longer. However, it is essential to consider the possibility of living beyond the average lifespan. When calculating retirement funds, it is prudent to plan for at least 15 years after reaching the age of 65.
Various Methods for Test Driving Retirement:
There are several approaches to test driving retirement, allowing individuals to choose the method that suits their availability and proximity to retirement. Some may find one method more suitable, while others may opt for a combination of two methods.
1. Live on Your Retirement Budget for a Month:
To assess your comfort level with projected retirement income, attempt to live for a month on that income. Financial advisors often recommend that retirement savings should enable individuals to live on 80-90 percent of their current income. By adhering to this budget for a month, you can determine whether it is sufficient or if adjustments are necessary. If the budget falls short, it may be advisable to increase retirement savings or consider delaying retirement by a few years.
2. Spend a Week at Home:
Instead of traveling during your test drive, take a week or more off from work and spend time at home. This will help you understand whether you quickly become bored and run out of activities to engage in. It will also shed light on whether you enjoy spending extended periods alone or with your spouse, participating in activities such as watching TV or pursuing new hobbies. According to AARP, spending more time with your spouse can be challenging if you are not accustomed to it.
3. Experience Your Desired Retirement Location:
If you plan to relocate for retirement, it is advisable to spend a couple of weeks in your desired location before making the move. Whether it’s within the same city or in a different country, this test drive will reveal whether the location is as comfortable and affordable as anticipated. It is essential to avoid the disappointment of moving without prior experience.
Preparing Financially for Retirement:
Before retiring, it is crucial to minimize your debt as much as possible. Paying off your mortgage, credit cards, car loans, and high-interest debts will reduce your financial obligations and provide more disposable income each month. Downsizing is another option to consider, as it allows you to live on a reduced budget. This may involve moving to a smaller house in your current location or relocating to a state with lower taxes or no tax on retirement income.
Reducing Future Taxes:
To reduce future taxes, consider allocating some of your retirement funds to a Roth account, such as a Roth IRA or a Roth 401(k). Contributions to these accounts are made after taxes, meaning you will pay taxes upfront. However, this strategy offers the advantage of minimizing taxes later when mandatory minimum distributions (RMDs) become necessary.
Conclusion:
Taking a test drive before retirement provides valuable insights into the feasibility of your plans. It allows you to determine whether your expectations align with reality and helps you identify necessary adjustments. By assessing your financial capabilities, estimating lifespan and expenses, and experiencing various aspects of retirement firsthand, you can make more informed decisions and ensure a smooth transition into this significant phase of life.
