How Can a Financial Advisor Help Me if I’m 5 to 10 Years Away from Retiring?

Are you in the twilight of your career or feeling like retirement isn’t quite as far off as it used to be? Even though you’re not retiring next week, it’s normal to begin wondering if your ducks are as lined up in a row as they can or should be. Five to ten years out from retiring is a good time to evaluate how realistic your retirement goals are, based on anticipated retirement income.

If this sounds familiar, you are not alone. With the baby boomer generation (born between 1946 and 1964) moving into their “Golden Years,” the thought of a sustainable retirement is top of mind for many. More specifically, baby boomers are asking, “Will I have enough money to retire?”

The first step to understanding just how financially prepared you may be to retire is to consult a wealth manager or retirement planner, who can walk you through the following steps.

Determining How Much Money You’ll Need to Sustain Your Lifestyle
Calculate your fixed monthly expenses, which include mortgage, utilities, insurance, car payment and any other monthly or annual expense. Once you know your fixed expenses, estimate how much you anticipate spending over and above your fixed expenses. These expenses cover entertainment, vacations, hobbies, and anything else considered a lifestyle expense. There are several ways to come to this number. Some people use a percentage of their current salary, such as 75%. Others create a detailed budget that accounts for every expense. The more detailed you can be the more likely you are to avoid surprises or oversights.

Taking Inventory of the Fixed Income Streams You Will Have in Retirement
Social Security is the most common source of fixed income in retirement. Other fixed income streams might include a pension benefit, rental property income, deferred compensation plan, and other income sources that are predictable and paid on a regular basis.

When it comes to planning for retirement, there may be some very important decisions to make, for example when to start taking Social Security, whether to take a survivor benefit on your pension, and how many years to take your deferred compensation payout. The bottom line is that you need to know what you have available to you. Hiring a retirement planner or wealth manager could greatly increase your ability to make the correct decisions to maximize your benefit from these important sources of retirement income.

Figuring Out Your Portfolio Reliance Rate
Once you know how much money you need to live each month and what your fixed income streams are, now comes the fun part, figuring out how much of your portfolio you are going to have to withdraw each month to meet your living expenses.

This is called your Portfolio Reliance Rate (PRR). Here is an example:

  • Let’s assume that you have $1,000,000 in investments
  • You need $8,000 per month to live
  • You have $3000 per month in fixed income streams

Because you need $8,000 a month and you only have $3,000 a month in fixed income, you will need to draw $5,000 each month from your portfolio. This means that you need $60,000/year from your $1,000,000 portfolio to meet your living expenses, which is 6% of your portfolio.

In this circumstance, your PRR rate is 6%. The higher your PRR, the more likely you will drain your accounts over time. The lower your PRR, the more sustainable your retirement accounts will be.

Using Scenario Planning to Gauge the Likelihood of a Financially Successful Retirement
There are several different methods to gauge your retirement assets’ sustainability. By hiring a CERTIFIED FINANCIAL PLANNER™ professional or retirement planner, such as our team at Metcalf Partners Wealth Management, you will get the opportunity to use a planning system.

Our system, Wealth Vision, runs a sustainability test called Monte Carlo that generates outcomes based upon certain stock market and investment scenarios. Monte Carlo shows how likely you are to outlive your money, as well as what your best case, worst case, and median(likely) scenario will be. This helps us quickly identify candidates that are ready to retire, and candidates that may need to come up with an alternate plan.

Adjusting Your Retirement Plan to Maximize Its Success
If you’re not comfortable with the retirement scenario outcomes, the next step is to adjust your plan. If you are still 10 years from retiring, you might be able to increase savings, decrease your expected retirement lifestyle expenses, or decide to retire a few years later.

In many cases, the outcome may show that you are in better shape than you thought, possibly allowing you to retire earlier or live a better lifestyle in retirement than you originally thought. The solution will be different for each individual, but by planning early, you will be in a great position to make the necessary adjustments.

READ: Your Gut is Right. Not All Financial Advisors are Alike

Regardless of your situation, remember that it is never too late or too early to start retirement planning.  The best recommendation that we can give you is to engage a CFP®, retirement planner, or wealth manager to help. It may be the best use of time and money that you have ever spent!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The investment strategies mentioned here may not be suitable for everyone. The hypothetical example provided is not representative of any specific situation. Your results may vary. The hypothetical example used does not reflect the deduction of fees and charges inherent to investing.