After many years as a financial adviser, I retired early this year. This was an interesting and exciting transition after many years of planning for my clients’ retirements.
Long ago, I realized that competent financial advisers generally did a great job advising people approaching retirement about how to accumulate wealth: how much to save, where to invest and which products to choose.
But I didn’t think we were doing such a great job of telling people what to expect when they retired.
So here are a few observations from a member of the Retirement Class of 2022.
My situation was different from those who retired in the past because I had two years of a pandemic to practice being at home. For example, my husband and I were able to eat meals together when I emerged from my home office, eliminating the cost of lunches out or dining out because I worked late.
But some things about retirement remain true as the pandemic eases.
It really does take several (or many) months before your finances settle into a recognizable pattern. When I did financial planning for clients, I estimated what a retiree would need for monthly income. That estimate typically had to be adjusted in real-time when their paycheck stopped.
Although I no longer buy clothes for the office or online appointments, I found I needed to beef up my wardrobe of shorts and T-shirts as summer approached. We use less gasoline in the car but spend more on utilities because of the cost of heating and cooling the house has increased now that we’re home more hours of the day.
Expenses have increased because we’re traveling more and doing things we just didn’t get around to when we were working. Many retirees find this is true.
As an adviser, I always assumed inflation would increase the cost of goods and services during retirement but it hadn’t really affected financial plans significantly until recently. Then, wow! Inflation was up 8.5% over the last year, as of July 2022.
This occurred during a period of seemingly wild and often fast fluctuations in the value of investments. It can be downright scary to see a significant downward plunge in the value of your portfolio when you’re retired and not adding money to your assets.
I’ve seen lots of market swings during my time and learned that the biggest mistakes are made in haste. We discuss our needs and risk tolerance and plan to stick with our investment plan unless there’s a good reason to change it, just as we did before retirement.
That doesn’t mean we don’t watch our spending. Studies show that market fluctuations in the first two years you withdraw income from your investments can significantly affect your ability to make your investments last throughout retirement.
You need to keep an eye on income taxes. You have a choice about whether and when to take income from Social Security, pensions, part-time work, retirement accounts and investments. All of them have income tax consequences and the wrong choice will increase your income taxes.
Social Security is tricky. You have one opportunity to file and your choice can’t be changed (with a couple of notable exceptions.)
My experience is that most Social Security agents try to get you the highest amount of money available right now. This often isn’t the best long-term strategy for maximizing your benefit, and I’ve encountered agents who aren’t trained in alternative strategies. I’ve even known clients who incurred penalties and installment payment paybacks after following recommendations from Social Security agents.
I plan to file for Social Security at the age of 70 because that’s the age that maximizes its benefit. But that’s not the best choice for some people. This is where the advice of a trained financial adviser can be really useful.
Let’s be honest: Medicare planning for health insurance is a pain. It requires more research than calling a toll-free number to check your ZIP code, as television commercials suggest. Find a competent health insurance agent who offers many types of plans — both Medicare Part C (commonly called Advantage Plans) and Medicare Supplements — to get the best advice.
Be aware that just because you’ve quit working, Congress still is working to change the laws. Among the things they could approve soon is moving the age of Required Minimum Distributions from retirement accounts from 72 to 75.
All of which is to say, you still need a competent financial adviser even after you’ve retired, preferably a Certified Financial Planner professional who does the required continuing education to keep up with these changes. Bonus points if you work with one with a specialty in retirement planning.
Retirement can be an energizing new season in your life, but it works best if you stay aware of your retirement environment.
Barbara McMahon is a CERTIFIED FINANCIAL PLANNER professional and member of the Financial Planning Association of Greater Kansas City.