University instructors were overworked, worried, and worn out as a result of the COVID-19 pandemic, according to 2020 research by Fidelity and the Chronicle of Higher Education. Third or more tenured professors reported having thought about retiring, switching employment within higher education, or changing occupations. Even though the study was conducted more than a year ago, COVID-19 and its variations still pose a threat to academic institutions. Will you start to retire in 2022? If so, it’s time to learn how to budget effectively, optimize your cash flow if necessary, and be prepared to handle unforeseen expenses when they come up, as well as how much you need to maintain your chosen lifestyle.
STEP 1: Before you stop working, start tracking your expenses.
Big numbers, like your mortgage, rent, or car bills, are simple to recall. But could you provide a precise breakdown of your monthly spending? According to a recent Intuit study, 65% of Americans are unaware. Because of this, it’s critical to be aware of your spending habits while you still receive a paycheck. By doing this, you’ll be able to:
- What are your fixed and variable expenses are;
- How much fluctuation do you have in your spending from week to week;
- Which expenses could be cut if needed to live comfortably in retirement; and
- How much your retirement distributions will need to cover each month after you retire?
Get the process rolling by taking an inventory of all of your checking, savings, and credit card accounts. Next, analyze how and what you’re spending each month in each account. If you carry a balance on your credit cards, be sure to note it and whether the balance is going up or down each month.
You can use a simple spreadsheet to track your expenses, keep a handwritten log, or use a free app. As you do, assign a category to each expense so you can determine where you spend the most. This will also help you create a budget later.
STEP 2: Create a budget to serve as your retirement roadmap.
Even while tenured university employees have some of the most substantial and stable pay packages available, it could be challenging to maintain that standard of living after retirement. Starting by understanding your possible income streams is one method to comprehend and manage your retirement income. This could be a combination of Social Security, savings accounts, pension payments and/or defined contribution plans, and outside brokerage accounts; however, you might find it challenging to decide on your own which accounts to access first and how to manage risk and the tax repercussions of your choices.
An independent financial advisor familiar with university benefits can review your options and work with you to create a tax-efficient plan and consistent income stream that will last throughout your retirement. Remember that fees and commissions can diminish your savings over time, so beware of high-commission products, such as annuities, or brokerage accounts that charge high fees per trade.
Once you have an idea how much monthly income you will have, you can determine a budget based on the expenses you tracked while you were working. Start by plugging in your fixed expenses, including your mortgage, utilities, property taxes, and insurance. Then, refer to the categories you tracked, such as food, clothing, housing, transportation, entertainment, travel, and gifts.
Once you retire from the university system, you may need to replace benefits such as health insurance and life insurance. Some universities allow retirees to continue their health coverage, but you may need to pay your own premiums, which can be quite expensive. Private insurance plans can also be expensive compared to the group coverage you may have had while working. If you are 65 or older, you may choose to go on Medicare, but you will need to understand how the coverage differs from your previous insurance.
If you had a group life insurance policy at the university, you will likely lose it when you retire; however, having a life insurance policy can be beneficial in retirement, particularly if you need long-term or end-of-life care. To get the most affordable coverage, you may wish to begin shopping for life insurance well before you retire, while you are still healthy. Life insurance policies often require a medical exam and an underwriting process, and premiums tend to be more affordable the younger and healthier you are.
STEP 3: If necessary, take steps to improve cash flow in retirement.
Retirees have many options to help improve their cash flow in retirement, including working longer, taking Social Security later, selling appreciated stock, relocating to a state with a lower cost of living, etc. Your financial advisor can help you choose the best investment options for your situation, but taking on a part-time job or consulting can help you stay connected to your community, keep your mind sharp, and provide a “play-check” you can use for the extras you desire, such as travel.
A recent study by Savant Wealth Management and Absolute Engagement found that among 750 investors, nearly half planned to take a glide path approach to retirement by transitioning either to part-time or volunteer work first. Women were especially likely to transition to part-time work before stopping work completely.
STEP 4: Consider additional expenses.
Once you retire, it’s likely you’ll no longer need to budget for commuting costs or clothing for work. You may also be able to give up certain subscriptions or association memberships. But, you may face other expenses – for hobbies, increased travel, or entertainment – that could offset your gains. As part of your estate plan, you could also choose to leave financial gifts to children, grandchildren, or your university as part of your legacy. Your financial advisor and estate planning attorney can help you plan appropriately for these future expenses and incorporate them into your retirement budget.
Whether you’re considering retirement in 2022 or beyond, it’s never too early to begin working on a plan to sustain you and your family after you leave the university system. Focus on getting organized before you stop working to ensure you’ll have a long, happy, and fulfilling retirement.
The post Know Before You Go: 4 Steps to Prepare for Retirement first appeared on Savant Wealth Management.
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