If you want to retire comfortably, it’s crucial to start saving as early as you can. By investing in your work-sponsored 401(k) account, adding to your savings with an individual retirement account or brokerage account, minimizing debt and watching your expenses, 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 before you’re ready to leave your job. Here are three lifestyle decisions that make a big impact on how long your money will last:
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 people, this lifestyle isn’t possible. Even if you saved consistently, you may not have enough cash to live a lavish retirement. One important factor to keep in mind is that retirement may last 30 years or more. Saving enough cash to cover your living expenses for such a long period of time requires a healthy retirement account or other income source and a financial plan.
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 your financial goals and milestones, but you may need to consult a financial professional to get tips on making your money last.
If you don’t want a fancy lifestyle once you reach retirement, you might be able to get by with less savings. Your first step is 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.”
Once you identify your priorities, you can come up with a retirement planning checklistand determine the right amount of saving 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 Clint Haynes, a financial planner in Kansas City, Missouri. “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, the cost of living in various communities and 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. You need to decide if you should move closer to friends and family so you can enjoy their company and whether a given community has enjoyable activities like fishing or golfing. Or you might find yourself in the position of living in a very expensive city you can no longer afford to occupy. Many people automatically take these factors into account, but there’s one important point you might miss: how your needs will change over the course of your retirement. It’s vital to consider the long-term consequences of moving or staying. You need to think about what’s best for you over the course of the rest of your life.
Your decision to move or stay will affect your finances down the road. “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 Benjamin Brandt, a Bismarck, North Dakota financial advisor. “Other homeowners choose to downsize to limit maintenance costs associated with owning a larger home.”
Whether you plan to stay in your home or sell could have a direct impact on how much cash you have for retirement. “Your house is one of your largest assets,” says financial advisor David Niggel of Key Wealth Partners in Lancaster, Pennsylvania. “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.
Retirees who have enough money for retirement may feel they no longer need 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 Anthony Montenegro of Blackmont Advisors in Brea, California. That sentiment might be justified for some people, but completely disastrous for others. Market crashes, inflation and many other negative circumstances can impact your portfolio and purchasing power. It’s difficult to navigate these challenges alone as you get older, especially when emotions are involved.
Retirees should be careful how they invest their hard-earned money. There are some financial advisors who take advantage of their clients and might not have your best interests in mind. Never invest in something you don’t completely understand. Aim to use logic instead of emotions to make investment choices. And don’t make financial decisions solely based on what your friends are doing.
The decision to work with a financial advisor may have serious consequences for your retirement lifestyle. A poorly planned retirement could mean running out of money too soon. A solid retirement plan might allow you to leave an inheritance to your children and grandchildren.
The financial decisions you make now will determine the type of retirement lifestyle you end up with. Thoughtfully consider how you want your life to look twenty or even thirty years from now. Ask yourself if the choices you’re making will help or hurt your chances of achieving your retirement 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.