I attended an event over the weekend, mostly made up of people in their late 50’s to early 60’s. One frequent topic of discussion was retirement planning. Among this particular gathering, I noticed three distinct groups facing very different prospects in their future.
The first group never saved anything of note and have so much debt that they know they can never stop working. A few are still paying on deferred student loans, have loans on cars, and a mortgage that won’t be paid off for another +20 years. If they were ever unable to work in their future, it would be a great financial struggle and they’d likely have to move in with relatives, if any would allow it.
The second and largest group of potential retirees are counting down the months until they can retire. Their target date is either the earliest that they can receive social security benefits or the date for full social security benefits. This group is in decent financial shape but I didn’t hear of one that had actually mapped out their income and expenses for retirement, they are just going to do it and hope for the best. In one classic example, a woman had retired only two days earlier at age 62 and she still had no idea what her pension payment or discounted social security payment may be, but she said, “I believe I’ll be Ok.” Until it is mapped out, she cannot know for certain. Someone like this is a good candidate for what is called a “failed retirement.” This is when someone retires and leaves the workforce but then returns to work in 1-5 years because they discover that they cannot afford live on their retirement income. But since they are returning to the workforce with a job gap, they are now at a much lower rung with much lower pay, reduced benefits, and sometimes, longer hours. One man retired after financially mapping it out, but then had to go back to work part-time when his wife insisted on moving to a residence in a high-property tax location. His work is physically demanding and he is unsure how long he will be able to continue working. Physical capacity to work is one of the main financial risks of being forced to work late in life.
The third group, and the tiniest number, are those that can retire anytime they want. This is because their investments and real estate income is already higher than their current expenses. So they are already financially free, they just have not stopped working. Some enjoy working and others want the health insurance benefits. The people in this group all have a similar trait: from a young age, they focused on learning about investing, including direct investments like small businesses and rental real estate. While social security income makes up the vast majority of most retirees’ income, for this group, social security is a tiny amount of their income and is commonly spent on grand-kids or charity.
When you are approaching age 60, which of the three groups do you want to be heading toward? Which group would you prefer to be in? Exactly, what do you need to start doing today to make certain that you arrive there?