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How Do You Know if You’re Ready to Retire?

“Can I retire this year?” one of our wealth management clients asked us.

She’s a physician at a hospital where Covid-19 cases were rising rapidly, and she was concerned that she could get sick or even infect her family. 

Before the pandemic, she’d planned to retire in a few years, but now she’s hoping she can retire sooner rather than continue to put her health at risk. 

A University of Chicago study found that “the onset of the covid-19 crisis led to a wave of earlier than planned retirements.” Some people, like our client, are choosing to retire, while others who lost their jobs have decided to retire rather than try to find new work in this environment. 

“Among those leaving the workforce between January and April, 60% say they planned to retire rather than return, according to a report by the National Bureau of Economic Research,” Barron’s reported in June. 

Can you retire earlier than planned and still have the same financial security? Retirement is one of the biggest financial goals, and it usually takes time and careful planning to get all the pieces in place, so changing your retirement date can be a challenge. An early retirement may require you to make some changes to your investments and your investment approach.

Retiring early? 5 questions to ask.

Working with a financial planner, as our client did, can help you determine if you are financially able to retire earlier and what changes you might need to make to do so. (Read on for a financial planning example). If you’re managing your own portfolios, here are five initial questions to work through if you’re looking to retire ahead of schedule: 

1. Should I take less risk with my investments? 

If you’re going to need the money you’ve invested sooner than later, you probably need to rethink your risk tolerance and your overall allocation to stocks, bonds, and cash. 

Managing risk is critical as you’re nearing retirement. This is when you likely have the most money in your accounts, so you’ve got the most to lose if the market sours. (Read more on managing risk as you near retirement here.) 

If you’ve decided to change your allocation, plan out how and when you’ll transition from your current allocation to your new target allocation.

2. Do I need to change my investment strategy?

When you’ve got many years until you retire, it makes sense to have a growth-oriented approach to investing. When you’re closer to retirement or in retirement, however, you may want a strategy that’s designed to provide both growth and stability. 

Fidelity suggests thinking of retirement as reaching the summit of a mountain: “The muscles and strategies you used to get to the top are not the same ones you'll use to safely navigate the descent.”

3. How will I replace my income in retirement? 

Which of your retirement accounts should you tap first? Which of your investments should you sell? What other sources of retirement income do you have? 

Most people rely at least partially on social security benefits, and you’ll want to decide when to take social security. Early retirees should keep in mind that their social security payments will be less if they take social security earlier, so they may need to withdraw more from their accounts to cover their costs. 

4. How much can I withdraw from my accounts without running out of money?

You’ll want to think through your spending to get a sense of how much you’ll need to withdraw from your accounts. Will you withdraw a steady amount each year, or adjust your withdrawals over time based on the changes in the markets and your spending needs? 

For many years, retirees have used the so-called 4% Rule as a guideline, but that rule may not work as well in these market conditions.

5. Who can I turn to if I need help?

Retirement planning is complex, and you may want to work with an investment advisor or financial planner to help you bring all the different components together into a solid plan that’s right for you.

As Morningstar’s Christine Benz explained in an August 2020 interview on retiring early: “We all come into retirement with our own tool kits, our own situations, our own set of types of accounts that we have. I do think that this is a great spot to stop and get some help from a financial advisor.”

Many people are relying on a trusted advisor for help navigating this unprecedented market environment. The Nationwide Retirement Institute’s April 2020 COVID-19 Financial Survey found “that roughly one quarter (24%) of Americans are seeking help by engaging a financial professional for the first time ever as a result of the pandemic.” 

Financial planning example: Physician retiring early

Here’s an example of how financial planning helped the physician who wanted to retire this year:

Rohan Nayak, FundX financial planner and investment advisor, reassessed our client’s risk tolerance and her investment approach. This helped him identify some key changes to make to her investments in order to meet the changes in her time horizon, including dialing down risk in her retirement investments and shifting to a strategy that can provide greater stability.

Through the financial planning process, he organized her assets across her different accounts and discovered she’d moved some money into cash at the beginning of this bear market. She’ll need to be more fully invested to retire this year, so he strategized how to get that cash working again to help her money last throughout her retirement years. 

Our planner also worked through how the physician will replace her income once she fully stops earning her paycheck. He determined which funds to sell from her portfolio, given her tax circumstances and income needs. 

The financial planning process is quantitative and methodical, which the physician appreciated; she’s used to making decisions based on numbers. The process gave her the confidence that she could truly retire this year. 

She emailed us the other day to let us know that she had retired, just as we’d planned.  

If you could use some help with your retirement plans or you’re interested in making quantitative decisions about your finances, then this is a good time to work with FundX’s advisors and financial planner. The first step is to have a quick call and see if we’re the right fit. Click here and let’s find a good time to talk.

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