You need to be smart about your retirement. As well as financial considerations, there are physical, mental and social issues to consider.
Each of these four pillars are critical to ensuring you have a rich and fulfilling retirement.
Smart financial considerations for retirement
This is usually the main (and sometimes only) consideration retirees have. Let’s examine some potential pitfalls.
Relying on the 4% rule
The much touted 4% rule is a widely used guideline for determining the amount of money that a retiree can withdraw from their retirement savings each year without running out of money.
The rule was first introduced by financial advisor William Bengen in 1994, based on his research and analysis of historical stock and bond market returns.
The 4% rule states that retirees can safely withdraw 4% of their savings in the first year of retirement and adjust that amount annually for inflation.
For example, if a retiree has $1 million in savings, they could withdraw $40,000 in the first year and increase that amount each year to keep pace with inflation.
The idea behind the 4% rule is that retirees can live off the income generated by their savings while preserving their principal for the rest of their lives.
However, the 4% rule has several drawbacks and limitations:
- Historical market returns may not reflect future market conditions: The 4% rule is based on historical market returns and assumes that future returns will be similar. However, market conditions can change, and future returns may not be as favorable as the historical average, which could result in retirees running out of money.
- The rule does not account for differences in investment portfolios: The 4% rule assumes that retirees have a balanced portfolio of stocks and bonds. However, different types of portfolios can have different returns and risks, which can impact the amount of money that a retiree can safely withdraw.
- The rule does not consider changes in taxes or Social Security: The 4% rule does not account for changes in taxes or Social Security benefits, which can significantly impact a retiree’s budget. For example, if taxes increase or Social Security benefits are reduced, a retiree may have to adjust their spending or withdraw more from their savings to maintain their standard of living.
- The rule assumes a constant inflation rate: The 4% rule assumes that inflation will remain constant, but inflation can be unpredictable and may vary from year to year. This can impact a retiree’s ability to keep pace with the cost of living.
- The rule may not be suitable for everyone: The 4% rule is a general guideline and may not be suitable for everyone. Retirees with longer life expectancies or those who want to maintain a higher standard of living may need to withdraw more from their savings, while those who are more conservative may be able to withdraw less. Nowadays, those pursuing the FIRE (Financial Independence Retire Early) strategy might have retirements that last much longer than this.
While the 4% rule provides a helpful starting point for retirees, it is important to understand its limitations and to consider factors such as market conditions, taxes, and Social Security benefits when creating a retirement plan.
It is always recommended to consult with a financial advisor for personalized advice and to create a customized plan that meets your specific needs and goals.
When you choose to retire is important
Luck plays a huge role in the date of your retirement. If you’re smart about your retirement, you will choose to retire in a time of economic prosperity.
The aforementioned 4% rule has a higher chance of failing if you retire into a recession (as many are doing right now). Your odds of running out of money are higher.
That’s because if you start taking money out of your investment portfolio as the economy is crashing and your value is plummeting, you have less chance to recover from the impact of the recession.
Our advice is to start off with a more conservative spending plan, particularly during a recession, and only loosen the reins after a few years of retirement.
Failing to plan and budget for your retirement
When most people imagine their retirement, they see themselves in an idyllic setting, sitting on a beach drinking cocktails. The problem with this is twofold:
1. If travelling the world, visiting luxurious beaches, and drinking fine wine is your goal, this can be expensive. Often, the cost of people’s retirement ambitions is larger than their pre-retirement expenses. You must plan your retirement ambitions carefully and make sure you truly can afford them.
2. If you choose to retire early, it’s likely you still have most of your adult life to live. Humans need to feel a sense of purpose, a sense of growth and productivity for happiness. Make sure your financial plan budgets for activities that provide fulfilment, otherwise your retirement may feel hollow.
Smart physical considerations for retirement
One of the most overlooked aspects for a smart retirement is your physical health. All other retirement considerations are worthless if you neglect your physical health.
“A healthy man wants a thousand things, a sick man only wants one.”Confucius
It comes down to your diet and exercise.
You might find one easier than the other, but they are both equally important.
Staying physically active by taking daily walks is an easy win. But if you can work your muscles with bodyweight exercises you have a much better chance of retaining a fully functioning body beyond 100 years.
Furthermore, if you lack rich, nutritious foods, and high-protein meals, your muscle mass is more likely to deplete. Healthy food is also brain fuel, it is essential in keeping your mind sharp.
Smart social considerations for retirement
New hobbies and new friends
You’ve lived a full life so far and garnered a wide range of friends. But this should only be the beginning!
Losing daily access to work colleagues and after-work meals & drinks immediately removes a huge source of social stimulation.
That’s why it’s important you push yourself to join new social clubs, try new hobbies, and meet new people.
We are social beings and the vast majority of us crave some sort of semi-regular social interaction.
The people you meet later in life might be the most important friends you ever make.
Family, Family, Family
It needs underlining that your family is of utmost importance. Whether you have a large sprawling tree, or just a handful of close family members, prioritize them and they will prioritize you.
Of course, you might need to rely on them in your later retirement. But more than that, for a fulfilling retirement you should want to be part of their success and triumphs. Live vicariously through them and support them as much as possible.
Smart mental health considerations for retirement
It should go without saying, but your mental health is paramount. A smart retirement is to be aware of, and plan for, mental obstacles you may face during retirement.
Your mental health is contingent on all of the above
Your happiness and contentment rely on you satisfying the physical, social and financial considerations we have mentioned above:
- Exercise releases endorphins, which are mood-boosting chemicals in the brain, and also helps with sleep and reducing stress.
- New hobbies and learning opportunities help maintain cognitive function and reduce the risk of memory loss and depression.
- Maintaining social connections through community activities, volunteering or clubs and organizations can provide support and reduce loneliness, improving overall well-being.
- Having a sound financial plan and sticking to a defined budget can reduce stress by eliminating money worries.
The first two years may be rough
I hear from lots of retirees that adapting to life without the routine of work is discombobulating. After the initial high from finally achieving retirement, you can sometimes be left with an uncomfortable feeling.
Losing your sense of purpose in life can be jarring, particularly if you haven’t got a defined plan for what you want to do when you retire.
You’re institutionalized by decades of the 9-5 to the point that you almost miss it (it might be Stockholm syndrome!).
But inevitably, you will adapt and realize that the freedom you now have is by far preferential. Know that the uncomfortable feeling will pass.
Find accomplishment and meaning in your retirement
Human beings are naturally inquisitive, purpose-driven creatures. A smart and happy retirement plays into this natural desire.
In order to be happy mentally, you must still push yourself to learn, explore and grow as person.
Ultimate fulfilment comes from a sense of continual incremental improvement & accomplishment.
This need not be a chore. You have no objectives to meet, no quarterly targets to hit. In retirement, your pursuit of achievement is for your own satisfaction and mental well-being.
Without this pursuit, your mind will atrophy and with it, your sense of happiness and satisfaction.
Many people imagine doing ‘nothing’ in retirement. This might be ok for the first couple of years, but it is not conducive to a fulfilling retirement.
Don’t be afraid to ask for help
We’re a society that traditionally shuns professional help, for various reasons.
If needed, don’t be afraid to seek professional help. It’s an effective way to manage mental health challenges and improve overall well-being. Mental health is just as important as physical health and taking care of yourself is key to a happy and fulfilling retirement.
Outside the box ideas for a smart retirement
The below ideas may seem strange but stick with us. They can be used to supercharge your retirement or to simply break up the monotony.
Try going back to work
Not your old work!
Your retirement is a time to pursue passions. Those passions might unintentionally be profitable. A side job or project can be a great way to supplement your income whilst keeping your mind sharp.
A part time job can be a great way to stay engaged in the community, reduce isolation and provide opportunities for social interaction.
‘Work’ and ‘Job’ are words that have negative connotations attached to them, but if you reframe your thinking and approach, they can be a great source of entertainment for your retirement.
Remember, now you’re retired, you are financially independent. At any point, you can walk away from a side project or part-time job. That is incredibly freeing.
Re-evaluate your cherished items
You’ve accumulated a lot of possessions through your life and may have grown too attached to some items. Are they truly cherished?
Get rid of clutter and streamline your possessions to reduce stress and make life easier.
This is a cathartic process. As well as helping you to stay organized and simplify your life, it signals the start of a new chapter in your journey.
Really outside the box ideas
Has none of the above inspired you? Here are 10 wild ideas to get the juices flowing:
- Start a farm or homestead
- Create a YouTube channel or podcast
- Convert a van into a mobile home and travel
- Start a bed and breakfast or Airbnb
- Take up woodworking or furniture making
- Offer pet-sitting or dog walking services
- Develop an app or game
- Learn a new language and teach it
- Join a travel group and explore new places
- Start a photography or videography business.
Be smart about your approach to retirement. All the best for the golden years ahead!