The Importance of the First Five Years in Retirement, by Todd Carmack

If you look at the first five years of retirement, the transition from working life is exciting. While half can maintain the same lifestyle, the other half cannot maintain similar spending levels. The CFPB (Consumer Financial Protection Bureau) recently assessed the spending of retirees over the course of 22 years. One key lesson was learned above all else: spending in the first five years was higher than during other retirement points. 

 

Why? When we first retire, it’s like a massive release. We can do all the things we dreamed of doing in younger years, from safari trips to buying a new vehicle. With this initial release, retirees also know that the early years of retirement will have the best health and most motivation. 

 

Over time, spending reduces (and not just on luxury trips). Retirees tend to spend less on home furnishings, clothing, and other general purchases. They can survive off Social Security, pensions, annuities, and other income sources for just over one-quarter of retirees. Elsewhere, another 25% sell investments and use savings. However, the more we dip into savings, the less money we’ll have later in retirement. 

 

With this in mind, the first five years are critical to how the rest of retirement will go. The decisions you make during this initial period will determine how comfortable you live later in life. 

 

Traditionally, the retirement analogy was a three-legged stool with Social Security, a pension, and personal savings. However, the removal of defined pension plans has forced workers into saving through an IRA, 401(k), and various other plans. According to a GOBankingRates, seven in ten have no more than $1,000 saved, and we could point to hundreds of additional studies with similar results. 

 

With pensions and personal savings falling, there’s tremendous pressure on Social Security. Although this wasn’t introduced to be the primary source of income for retirees, this is sadly the position we’re currently in. Recently, the Social Security Administration released some worrying statistics about this area: 

 

• Social Security provides over half of all income for 50% of married couples and 70% of individuals. 

 

• Social Security provides 90% of all income for 21% of married couples and 45% of individuals.

 

With the legs of the stool failing, more workers are having to work longer while also spending less and reducing their living standards. For those close to retirement, it seems to be Social Security or nothing. For the younger workers, we can glean some essential tips from the CFPB study that may strengthen your financial position. 

 

For example, those who had paid off their mortgages were in the best shape to continue their spending habits in retirement. After this, those who had bought a house were in a better position than those who rented. If you haven’t paid off a mortgage or are still renting, we highly advise considering a downsize. Is there something cheaper or smaller on the market that will allow you to live more comfortably in retirement? This is a difficult decision, but it’s an idea worth pursuing. 

 

Carrying a mortgage into retirement isn’t the worst problem in the world, but you should do all you can to remove all other debts before entering retirement. A mortgage is one thing, but trying to navigate retirement with credit cards, car loans, and other debts is incredibly tricky. If you have multiple sources of debt, see if you can consolidate them all into one. Failing that, lose those with higher interest rates first. 

 

Although the first five years of retirement may seem some time away, you should start planning now. Currently, the average retiree reduces spending by nearly 30% over the first five years. Even more surprisingly, around 17% of retirees have to cut spending by over HALF. Think about your finances now and start planning for a comfortable retirement, pay off debts, address the broken three-legged stool, and do all you can now to prevent stress later. 

Contact Information:
Email: [email protected]
Phone: 6232511574

Bio:
I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.

Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.

Other todd carmack Articles

Seven Steps You Should Take if You Want to Retire Early, by Todd Carmack

How Much Life Insurance Do You Actually Need? Sponsored By:Todd Carmack

Income Requirements for IRA Contributions Sponsored By:Todd Carmack

How Soon Should You Start Preparing For Retirement? Sponsored By: Todd Carmack

Leave a Reply