If you want to retire comfortably someday, it’s crucial to get your ducks in a row as early as you can.
By investing heavily in your work-sponsored 401(k) account, adding to your savings with an IRA and/or brokerage account, minimizing debt, and watching your pennies all along, you can set yourself up for retirement success.
Still, retirement planning isn’t one-size-fits-all. And if you want to avoid running out of money, it’s smart to make a few broad lifestyle choices that impact retirement before you’re ready to throw in the towel.
Which lifestyle decisions make the biggest impact on how long your money will last? Here are three decisions you should start thinking through fairly soon:
Decision #1: To live frugally or lavishly
The media likes to paint a beautiful picture of retirement, including plush yachts, sandals, and exotic drinks under umbrellas. But for many, this lifestyle isn't possible. Even if you saved consistently, you may not have enough cash to live high on the hog.
One important factor to keep in mind is that retirement may last upwards of 30 years.
Saving enough cash to cover your living expenses for such a long period of time requires not only a healthy retirement account or income source, but help from financial planning programs, too.
If you want to live lavishly, it’s crucial to make that decision early and tweak your retirement savings accordingly. A good retirement calculator can help you figure out how much you need to save to reach certain financial goals and milestones, but you may need to consult a financial planner to get tips on making your money last.
If you don’t want a fancy lifestyle once you reach retirement, then it’s perfectly fine to make some compromises now – and later.
Your first step is just deciding what you want.
“For some, world travel and adventure are the priority,” says Indiana financial advisor Tom Diem of Diem Wealth Management. “For others, settling in to focus on their hobbies or volunteer work fits the bill. Then there are people who are happy to have a nice place to invite their friends and family.”
By deciding what your priorities are early, you can come up with a retirement savings plan that works. Once you do, you can experiment with your spending to find the right amount for your needs.
“By far the most important decision you need to make prior to retirement is how much you need to live on a monthly basis,” says Kansas City Financial Planner Clint Haynes. “That’s the easy part though. Once you think you know what the number is, I then recommend trying to live on that amount at least three months prior to retiring.”
Decision #2: Whether to downsize your home and possessions
Most retirees who raised families need to decide whether to stay in their home or move to a smaller, more affordable place.
Some considerations that impact this decision include:
- Where family and friends live
- Cost of living in various communities
- Recreational opportunities
If you’ve lived in the same home for many years or even decades, weighing these factors is more than a financial endeavor; it’s an emotional one.
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Should you move closer to friends and family so you can enjoy their company? Are you living in a very expensive city you can no longer afford to occupy? How close are enjoyable activities like fishing or golfing?
Many retirees automatically take these factors into account, but there's one important point they might miss: how their needs will change over the course of their retirement.
As a retiree, it's vital to consider the long-term consequences of moving or staying. What's best for you over the course of the rest of your life? How will your decision to move or stay affect you down the road?
This is another decision you may want to make early. Why? Because whether you plan to stay in your home or sell could have a direct impact on how much cash you have for retirement.
“Some homeowners will choose to purchase a smaller home in order to unlock their home’s surplus equity and use that cash to fund retirement goals,” says Bismarck Financial Planner Benjamin Brandt. “Other homeowners choose to downsize to limit maintenance costs associated with owning a larger home.”
“Your house is one of your largest assets,” says financial advisor David Niggel of Key Wealth Partners in Lancaster, PA. “Once you reach retirement, downsizing may be a good financial decision to free up much needed capital.”
Decision #3: Whether to work with a financial advisor
“As investors look for ways to pare down costs in retirement, they sometimes weigh out the necessity and value of a financial advisor,” says Tony Montenegro of Blackmont Advisors. Further, many retirees who feel confident they have enough money and sense to stay on track may feel they no longer need to work with a financial advisor at all.
That sentiment might be justified for some, but completely disastrous for others.
Reverse dollar-cost averaging, inflation, market crashes, and many other negative circumstances can affect one's portfolio and purchasing power. It's difficult to navigate these challenges alone, especially when emotions are involved.
Granted, there are some financial advisors who take advantage of their clients. Because of these bad apples, some argue it's best to manage one's own wealth rather than trust an advisor who might not have their best interests in mind.
The decision to work with a financial advisor or not may have serious consequences on one's lifestyle in retirement. A poorly planned retirement could mean running out of money far earlier than you dreamed. A well-planned retirement could mean leaving an inheritance to your children and grandchildren.
How you want your retirement to look is totally up to you. But the decisions you make now will determine the type of retirement you end up with.
The best thing you can do now is long and hard how you want your life to look ten, twenty, and even thirty years from now. Ask yourself if the decisions you're making will help – or hurt – your chances of reaching your goals.
If you want a certain type of lifestyle, whether that includes staying in your home or living lavishly, make sure your investments reflect those desires.