Your countdown has begun. You find yourself fantasizing about what it will be like not to have to come to work every day. You smirk to yourself as you think, "I've got enough…and I've had enough!" You're within five years of retirement! Congratulations!
But before that grin on your face gets too wide, are you really ready?
With all the moving parts, deciding that you're prepared can be an iterative process as you think through the implications of the various decisions you'll make. To help the transition go smoothly, we'd suggest you consider the following six questions.
Question #1: Have you decided what retirement will look like, at least initially?
If retirement is only five years or less away, you should have a pretty good notion of what life will look like for you in this next chapter, at least to start. Will you stay where you live now, or do you plan on moving, downsizing, or building your dream home? If you don't move, how do you feel about keeping your mortgage rather than using some of your savings to pay it off? Will you have enough activities to stay busy and maintain a sense of purpose in your life, or will you seek part-time or full-time alternate employment?
Each of these decisions will impact your finances and could cause you to question your retirement timetable. And are you and your spouse aligned? If you plan on staying at home and your better half wants to spend three months a year traveling, well, there's a conversation you need to have.
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Question #2: Do you have enough money to cover your ongoing budget in retirement?
Here's a rough way to estimate your number. Calculate what you anticipate to be your recurring annual expenses in retirement in today's dollars. Offset that amount for any continuing income you'll be receiving during retirement (such as an ExxonMobil pension and Social Security). Gross that number up by dividing it by (1 minus your expected tax rate). Inflate the result by 2.5% per year (our inflation assumption) until you stop drawing your paycheck. Then, to derive a lump sum value, we'd suggest multiplying by 22.2.
If you anticipate having that sum available to support you, you should be in reasonable shape. It builds on a rule of thumb that you can spend an inflation-adjusted 4.5% of a balanced portfolio each year and stand a good chance of not running out of money before you run out of heartbeats.
If you plan significant one-time expenses throughout your retirement, you may want to add those to the sum. More sophisticated techniques are available (call us if you’d like to learn more), but the critical point is you don't want to quit that job if you lack assets to sustain your lifestyle.
If your savings aren't yet sufficient, consider fine-tuning your retirement budget, postponing your retirement by a few years, increasing your savings in the ExxonMobil Savings Plan or elsewhere, or planning on part-time work in retirement.
Question #3: Are your estate documents up-to-date?
You add up your ExxonMobil Savings Plan balance, your anticipated ExxonMobil Pension Plan benefit, and your home and your outside savings, and you may be surprised at how much you'll be worth.
If you haven't done so already, make sure you've thought through how those assets should be distributed if you were out of the picture.
We suggest you think in terms of the next five to seven years. Remember to think about your IRA. That’s where most of your EMSP and any tax-qualified pension lump sum will likely end up. IRAs pass according to beneficiary designations, typically not by will or trust document.
If you and your spouse should both die, are your kids capable of managing what might be left to them? You may be traveling more than in the past—do you have an updated health care proxy and medical directive, just in case? Get all this taken care of ahead of actually retiring. It can be complex, but that's not a reason to delay putting your affairs in order.
[ Read Next: 4 Areas of Your Estate Plan to Review in Light of COVID-19 ]
Question #4: Do you understand how you'll be insured for healthcare expenses?
If you're fortunate enough to have spousal coverage or the ExxonMobil retiree medical insurance to protect you between retirement and Medicare eligibility at age 65, consider yourself blessed. What you don't want is to go without coverage for a time. Unanticipated and uninsured medical expenses can detour even the best of retirement plans.
Question #5: Have you assessed your insurance needs in retirement?
If the kids are through college, you've paid for the house, and your retirement savings are in good shape, you may not need life insurance to make up for lost wages if you were deceased or incapacitated. On the other hand, life insurance could be of great value if your estate is likely to incur estate taxes or you want to establish a tax-free benefit for your heirs. You may also want to consider long-term care insurance as a means of helping to pay for nursing home or home health care should you or your spouse become incapacitated late in life. It’s more affordable the younger you are, and you’ll want to qualify while you’re healthy.
Question #6: Isn't it about time you began interviewing financial advisors?
We've written elsewhere about the value of working with a financial advisor. A disadvantage of approaching retirement is the reminder it offers of one's mortality. We all hope for a long and healthy retirement, but leaving the workforce is also a reminder that we won't be around forever.
We admire those financial decision-makers in the family who care enough about their spouse and heirs NOT to leave them unprepared for what might happen should they not be around. A trusted advisor who is knowledgeable about your finances and who can assist you in answering these questions can help keep that smile on your face as you prepare for retirement.
If you’re within five years of retirement and anticipate investable assets of $1M or more, we’d be glad to jump on a call with you to discuss your retirement readiness. Let’s talk!
Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation. Information about the ExxonMobil Savings Plan is believed to be accurate, but no guarantees can be made, as Plan details are subject to change by the Plan sponsor. The author is not an employee of ExxonMobil and his views are his own.