With the U.S. stock market roughly doubling in value over the last three years, many people are considering retirement.  If 2022 is your year to quit your day job and toss away the alarm clock, here are six things to think about before you hand in that resignation.

Distribution Rate:  Because you’ll be living off your money once you’ve retired, you need to pick a distribution rate from your portfolio.  If you haven’t done so, it’s worthwhile to read up on how to estimate your distribution rate and what constitutes a reasonable assumption.

The rule of thumb in financial services has been 4%; recently, however, some researchers are advocating for distribution rates less than 4% because of the persistently low interest rate environment.

Budget. Once you know how much you can take out of your portfolio each year, you need to understand your living expenses.  Before retiring, it’s important to construct a detailed budget of your annual spending, including household purchases, vacations, clothing, hobbies, out-of-pocket medical costs, real estate taxes, gifts, veterinary bills, and the list goes on.  Our suggestion is to analyze what you have spent over the last two years, then bump your estimates by 20%.

Taxes.  It’s important to understand the taxes you’ll owe once you’ve retired.  The distribution rate mentioned above is pre-tax. It will be reduced by whatever taxes you need to pay on your investments and the distributions from retirement accounts. For instance, if you distribute 4% and your tax rate is 25%, you will only be living on 3%.

Social Security.  You’ll need to make some decisions regarding Social Security. As you may know, you can claim as early as age 62 or wait until age 70.  What’s right for you depends on your career earnings history, your spouse’s history if you are married, and your income needs going forward. In general, it’s often a good idea to wait because the benefit increases each year you hold off on claiming.

Medicare.  While Medicare coverage is considered by most as quite good, it’s getting more expensive and more complex to manage.  There is Part A (hospital), Part B (physician), Part D (drug), supplemental plans, co-pays, and deductibles. While there is generally no premium for Part A coverage, premiums for Part B vary by your income.

Bad Markets. On top of all this, you need an investment strategy for when the financial markets become volatile. It happens every so often, and the declines can be devastating and potentially long-lasting.  A typical retirement may last up to 30 years.  If you go back in history, at least once (and often more than that) in any 30-year time frame, the market has experienced a decline approaching 50%.

If all of this sounds like a lot of work, it is. You don’t want to head into retirement without being fully prepared. It’s a great privilege to retire, but it also comes with serious challenges. Many people retire without fully considering all the parts they must manage to successfully live off their money for multiple decades.

Be sure to work with your financial advisor for retirement guidance as it relates to your unique circumstances. If you are in need of a complimentary retirement review, please connect with our advisory team, we’d be happy to help.

Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

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