Opinion: Time to test drive your retirement plan

Paula Dougherty

Two emotions are common for those who are nearing retirement: excitement and fear. Leaving the working world behind can feel empowering, however, apprehension about entering a new life stage may also creep in. If you’re nearing retirement, you’ve likely taken steps to prepare financially for the future. But there’s one important thing you might not have considered adding to your preretirement checklist – a practice run. Test driving aspects of your plan with these steps below before you’re actually in retirement can help provide a sense of security for this next phase of life.

1. Consider what an ideal retirement looks like in the long term. How you choose to spend your time in retirement is your decision to make, but it’s not always an easy one. As we age, our interests, hobbies and relationships change. What you may consider your ideal retirement when you’re 55 may not be the same as when you’re 65. This evolution can make it hard to plan accurately for retirement. Consider sitting down with your spouse or family members to explore how aging and future milestones may alter your retirement. Your financial adviser can help you make a plan that aligns your ideal retirement with your financial situation.

2. Test drive your retirement lifestyle. Many people pledge a significant amount of savings toward a particular lifestyle in retirement. This could be a home in another part of the country, a timeshare or a trip abroad every year. Problems can arise if you have cemented a financial commitment to a certain lifestyle but change your mind down the road.

For example, those who have based their financial plan for retirement on the idea that they will be living in a new location may benefit from a practice run before making the big move. Consider an individual who has lived their entire life in New York but moves to Florida when they retire – where taxes and cost-of-living are generally lower. After several years, they decide to relocate back to New York to be near family – where cost of living and tax rates differ. That can mean savings may not go as far as planned. Be prudent and build some flexibility into your plan to avoid unintended consequences.

3. Simulate your retirement expenses. Practice can also be beneficial in another way: simulating how to manage your expenses in retirement. The idea that your cash flow no longer comes from a reliable paycheck, but from other sources like Social Security and personal savings can come as a shock – even to those who are well prepared for this change.

One idea to accomplish a sense of financial security is to run two accounts for a certain period of time. Through one account, manage all of your household and lifestyle expenses that you expect during retirement. This includes the costs for necessities like food, clothing, shelter, utilities, taxes and insurance as well as nice-to-have items. Keep in mind that you may have to estimate or inflate your lifestyle expenses for retirement as they could rise when you have more free time.

Through the second account, manage all of your expenses that are expected to end in retirement like principal and interest on a mortgage payment (if your home will be paid off), current car payments (although car payments can certainly happen again in retirement), college costs for your kids and contributions to retirement plans. Keeping these two separate accounts will help you more appropriately plan for and quantify your expenses in retirement.

The best way to get a handle on these expenses is to experience them while you’re still working. Take that trip to Europe before retirement and find out first-hand what you can do within your budget. If the cost is different than expected, make adjustments to your financial projections to more accurately reflect reality.

4. Perfecting life in retirement. A little practice can go a long way toward easing emotional and financial concerns when it comes to making the jump into retirement. Consider working with a financial adviser who can help you determine a budget and a retirement income plan that fits your needs and desires.

Paula Dougherty is a certified financial planner and private wealth adviser with Achieve Private Wealth, Ameriprise Financial Services LLC in Springfield. She can be reached at paula.j.dougherty@ampf.com.