If you spend a good portion of your day in a building like an office or a school, chances are good that you've participated in a fire drill. Those faux escapes give everyone a chance to practice evacuating the building and give those in charge an opportunity to identify and fix any potential problems.
If retirement is on your horizon, it would probably make sense to do something similar. Call it your “Retirement Fire Drill.” After all, sometimes you get to choose when you retire, sometimes (through illness or layoffs) you don't. It's good to be prepared.
So let's sound the alarm and pretend that today is the day that you're transitioning into the next phase of life. How will the planning you've done so far hold up in the real world? Below are five areas to test.
Is your budget going to work?
You have made a retirement budget, haven't you? If not, download a free budget worksheet at www.intentionalretirement.com/resources. What will your sources of income be once your paycheck stops? Do you have a realistic estimate of how much that income will be? How about expenses? Some people say you can live on about 70 percent of your pre-retirement income, but is that realistic for you?
There's only one way to find out. Practice living for a few months on the income and expenses that you've projected. Then re-examine your budget and see if anything needs to change. If it didn't work for a two-month trial, it probably won't work for a 20-year retirement. Take what you learned and make adjustments as necessary.
Is your asset allocation going to work?
If you retired today, how would your investments fare if we had another downturn like 2008? Are you invested too aggressively? Or how about if we got into a period like the late 1970s and early 1980s when inflation increased by double digits each year. Are you invested too conservatively for your retirement income to keep pace?
Shocks to your portfolio early in retirement greatly increase your chances of running out of money. You can minimize that risk by having your asset allocation correct and by setting aside a year or so of retirement income in cash so you can draw from that, rather than your investments, in the event of a downturn.
Is your health care going to work?
You won't be eligible for Medicare until age 65. Are you planning on retiring before that? If so, how are you planning to bridge the gap? Even if you wait until 65, do you have enough set aside to pay for the premiums and co-pays required under Medicare? Have you budgeted in the cost of a Medicare supplement policy?
Are there any health care issues (e.g. dental work, operations) that you should take care of now, before transitioning into retirement? And what about long-term care? What if you or your spouse became disabled or needed ongoing professional care? Do you have a plan to pay for that care that doesn't include spending down all of your assets and leaving the healthy person in a financial bind?
Is your income strategy going to work?
If you and your spouse are 65, there's a 72 percent chance that one of you will live to age 85. There's a 45 percent chance that one of you will live to age 90. Will your income last that long? Are you taking a sustainable amount from your investments each year or are you in danger of running out of money because you're taking too much? Will part or your income (such as a pension or Social Security) disappear when you or your spouse dies? Can the surviving spouse live on the remainder?
Rework your budget to factor in one or more of those income shocks and then think about how you would respond.
Is your estate plan going to work?
If you plan on moving to a different state, have you checked with your attorney to see if your will and estate plan documents will be valid in the new state? What if you became disabled or incapacitated? Do you have powers of attorney that specify who takes charge? If that person is your spouse, what happens if he or she dies before you?
Does your will reflect your current wishes? Do you have the correct beneficiaries listed on accounts and insurance policies? Are your documents organized and easily accessible?
Do everything you can to have your affairs in order.
How did you do?
If you encountered a few problems, don't worry. One of the great things about a drill is that it's just practice. Take the information you learned from the fire drill and tweak your plans to give yourself a better outcome. That way you'll be ready when the real alarm bell sounds.
Joe Hearn is an Omaha financial planner. He can be reached at 402-331-8600 or by email at email@example.com.