Figuring out if you’re ready for retirement is a difficult challenge.
If you’re wondering where you stand, compare your progress against these 5 milestones you must reach before you retire. Once you’ve checked these 5 boxes, you can take comfort that you’re ready to cross The Starting Line.
For most of our working lives, we’re focused on balancing our day-to-day lives with our long term preparations for retirement. We try to balance the goals of living below our means while enjoying the journey. That’s a great approach for the majority of our careers, but there’s more that needs to be done as you approach The Starting Line.
Deciding on when you can retire is one of the most important financial decisions you’ll make in life. Don’t take it lightly. It’s important to get it right, and comparing your progress against these 5 milestones you must reach before you retire is a good way to ensure you’re checking the right boxes before you finalize your decision.
With that, here are the 5 milestones you must reach before you retire:
1. You’ve Estimated Your Retirement Spending
Deciding on the lifestyle you want to live in retirement and estimating the costs associated with it is the first of the milestones you must reach before you retire. It is the foundation upon which your retirement decision is built, and no decision on retirement should be made without a solid estimate of your retirement spending requirements.
How To Do It: Three years before our retirement, we tracked every dime we spent for 11 months (we tried for a full year, but fell short). We broke down our spending into major categories, then developed projections for how these costs would change in retirement. I wrote a post on the details of our process here, which included the following example of our approach:
I’ll be the first to admit that the process is a pain, but I would never make the decision to retire without going through the exercise in detail. It’s also a good time to think about how your spending will change in retirement, given that your spending in retirement is the number that really matters. Do you want to live frugally, or do you want to enjoy a few luxuries? Important decisions that must be made before you finalize your decision on when you can retire.
Don’t: Use a rule of thumb, like the well established “80% of pre-retirement” spending.
Ready To Begin? Use this link to make a copy of the spending tracker we used, modify it as necessary, and start logging that spending. Have fun. Wink.
2. You’ve Calculated Your Retirement Cash Flow
Once you’ve estimated how much you expect to spend in retirement, the next of the milestones you must reach before you retire is to determine how you’ll cover those expenses through the duration of your retirement. It’s important to take a holistic approach in analyzing your cash flow, including fixed income, part-time income, and investment withdrawals.
As you’re analyzing your estimated cash flow, it’s important to include tax obligations in your spending calculations. If you’re going to be pulling before-tax IRA/401(k) funds, recognize that taxes will be due on the withdrawal. Taxes complicate the matter a bit, but these are real expenses that you will be required to cover from your cash flow, so ensure you’ve included them in your analysis.
How To Do It: I wrote a detailed post on the process we used to model our retirement “cash flow” through Age 95, which you can read here. First, you calculate all of your fixed-income sources, as illustrated in the example below:
Once you’ve subtracted your fixed-income from your expenses, the focus shifts to how you’ll fill the remaining “gap” to cover your estimated expenses. Now is the time to be realistic about any potential part-time income as well as annual withdrawals you’ll need to make from your investments. Throughout the process, we used conservative assumptions to build a bit of a buffer and didn’t retire until we were confident we could cover our spending with a 3 – 4% Safe Withdrawal Rate from our investments.
Don’t: Forget about taxes, or be too optimistic with your assumptions.
Ready To Begin? Use this link to make a copy of our Retirement Cash Flow Model.
3. You’ve Positioned Your Portfolio For Withdrawals
Moving from decades of accumulating wealth to withdrawing from your investments is one of the biggest challenges of retirement. The lessons you’ve learned while accumulating wealth are NOT the same as the ones you’ll need to strategically withdraw while funding your retirement lifestyle.
Take some time in your final year of work to get your strategy in place for the withdrawal phase. Your life in retirement will be better as a result.
How To Do It: While there are a variety of ways to structure your portfolio for retirement withdrawals, we’ve settled on the Bucket Strategy as the approach we’re using (see how we set it up here). We also determined a long-term drawdown strategy, including our plans for Roth conversions, which we’re doing annually now that we’re retired. Starting at least two years before your retirement date, develop and implement a plan for how you’re going to position your investments to fund your retirement.
Don’t: Wait until you’ve retired to build 2-3 years of liquidity in your portfolio. Rather, have the liquid money safely set aside by the time you retire.
Ready To Begin? Use this worksheet to see where your assets fit within the various buckets.
4. You’ve Conquered Debt
It’s a fact that a full 78% of Baby Boomers are carrying debt as they approach retirement. While it’s a fair debate whether or not paying off your mortgage is the right move for retirement (especially if you’re carrying a low fixed-rate mortgage), there’s no excuse for carrying any other debt into your retirement years. If you’ve struggled with debt, make paying it off a priority in your final years of work.
We paid off all of our debt (including our mortgage) before we retired, and I can testify firsthand to the peace of mind that comes from having no debt when the paycheck stops flowing.
How To Do It: If you’re struggling with paying off your credit cards, it’s time to get serious. Track all of your spending for a few months, then establish a firm budget to ensure you don’t overspend. Put your credit cards in a bowl of water and place them in your freezer for 6 months, or until fully paid off. Sign up for a Dave Ramsey class, or do some Google searches on effective approaches to get out of debt. Build some extra income through a side hustle for a year or two, and dedicate every dollar earned to paying off your debt. Sell anything you don’t use on a Facebook Yard Sale site for your area. Stop eating out until you’ve paid off your credit cards. Do whatever you have to do, but get those cards paid off before you retire.
Don’t: Retire if you haven’t paid off your credit cards.
5. You’ve Thought Beyond Financial Issues
While most people focus on the financial aspects as the primary milestones you must reach before you retire, the reality is that the non-financial aspects will likely prove to be more important than money in your retirement. Don’t make the common mistake of focusing on the financial issues without considering what you want your life to be in retirement.
Once you’ve established financial independence, the planning on the non-financial aspects of your retirement is the most important of the milestones you must reach before you retire.
How To Do It: As you get closer to The Starting Line, increase the amount of time you spend thinking about what you want your life to be after you’re done working. At this point, your financials should be in decent shape, so think less about them and more about your ideal life in retirement. Start putting slips of paper in a retirement activity jar. Plan a retirement test drive in your final year of work. If you’ve got nothing better to do, you may even decide to read my book (wink), which you’ll find is focused on the non-financial aspects of retirement planning. That’s not by accident – this is, perhaps, the most important milestone to ensure a successful retirement.
Don’t: Ignore the non-financial aspects of retirement planning.
Making the decision on when you will retire is one of the hardest decisions you’ll face in life. By comparing your status against each of these 5 milestones that you must reach before you retire, you’ll be able to identify any gaps as you finalize your decision. Done correctly, retirement can be one of the most enjoyable phases of life. Done prematurely, it can lead to decades of regret.
I trust these milestones will be helpful as you prepare for your ultimate retirement. My wife and I checked every box as we were preparing and I’m convinced they were critical in helping us achieve a great life in retirement.
I hope they do the same for you.
Your Turn: Have you checked every box? If you’ve already retired, what milestones have I missed? Let’s chat…
Originally posted at https://www.theretirementmanifesto.com/5-milestones-you-must-reach-before-you-retire/