Retirement planning is a crucial stage in life, similar to making significant financial decisions like buying a car or a house. Loren Merkle brings a fresh perspective on the concept by introducing the idea of “test-driving retirement.” This approach involves taking steps to “test out” your retirement lifestyle, income, taxes, investments, health care costs, and legacy planning before taking the plunge into retirement.
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Test Drive Your Lifestyle
The first step is to imagine how you will spend your time once you retire. It’s important to think about your passions and what new purposes you might find. Whether it’s golfing, traveling, or spending more time with family, figuring out these details will help set the stage for all the other elements of your retirement plan.
Test Drive Your Budget
One of the biggest concerns for most pre-retirees is managing income in retirement. A practical way to address this concern is to simulate your retirement budget. If you anticipate that your lifestyle will require $6,000 a month, try living on that amount for a year before you retire. This exercise can help eliminate surprises and assist you in building a reliable retirement income plan.
Test Drive Your Retirement Tax Bill
Next is understanding your retirement tax bill. Loren mentions that the retirement planning process includes helping families and individuals estimate what they’re likely to owe in taxes during retirement and exploring strategies to potentially reduce that amount. For example, Loren mentions a hypothetical couple, John and Sue, who managed to knock off over $100,000 from their estimated retirement tax bill through long-term tax planning, including a Roth conversion strategy. Understanding and planning for taxes now can lead to substantial savings down the line.
Test Drive Your Investments
Equally important is test-driving your investments. Your investment strategy leading up to retirement may not be suitable once you’ve retired. Understanding how much risk you’re currently taking with your investments is fundamental. Loren stresses that you’ll need to assess whether your risk level is appropriate and consider how your portfolio would respond to various market conditions. The goal is to ensure that your investment strategy aligns with the new retirement goals, such as drawing income rather than accumulating wealth.
Test Drive Your Health Care Costs
Health care is another significant expense that can impact your retirement plans. According to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old may need $165,000 in after-tax savings to cover health care expenses. That amount is up nearly 5% from 2023.
Understanding your health care needs and possible future changes can help you better prepare to manage these costs. Plus, let’s not forget about long-term care. According to Genworth, the national annual median cost of a semi-private room in a skilled nursing facility is $104,000, while the cost of a private room in a nursing home is $116,800 a year.
Test Drive Legacy Planning
Finally, consider legacy planning. It’s essential to consider what happens to your assets after your last day. Do your current documents, like wills and trusts, reflect your final wishes? Are they legally sufficient to achieve what you intend? By reviewing these documents, you can ensure that your belongings go to the right people or causes, providing you with peace of mind.
Why Start Early?
Loren says the sooner, the better when it comes to retirement planning. He recommends starting within ten years of your intended retirement date. Unforeseen circumstances like job loss or health issues can accelerate your retirement timeline, making early planning invaluable.
Conclusion
Test driving your retirement involves thoughtful planning and consideration of various scenarios that will play out once you retire. Each decision requires careful consideration and iteration, from lifestyle and budget to taxes and health care. A comprehensive approach to retirement planning ensures that you cover all aspects of retirement, providing peace of mind and setting the stage for a confident retirement.
Click here to watch the full episode “Put Your Retirement Plan to the Test” on YouTube!
Source: Fidelity.com, Genworth.com
