I’m sure you’ve heard the saying “Rome wasn’t built in a day.” But have you ever considered what that actually means? It takes time to complete an important task…a lot of time! In the case of Rome, think about all the planning that went into acquiring the land, designing the city, getting proper building permits, interviewing contractors…OK, perhaps we’ve ventured into modern day issues! But the point is it took a lot of time and planning.
Retirement planning as a member of STRS Ohio may not seem much different. But I’m convinced there’s one thing almost every member approaching retirement should do to significantly reduce the uncertainty of the early retirement years. This one thing has very little to do with your 403(b), pension, or decision to PLOP or not to PLOP. Rather, this one thing attempts to make your transition into retirement as seamless as possible.
So what do I believe is the best way for STRS Ohio members to prepare for retirement?
Live as though you’re retired…before you actually retire!
That seems pretty simple, yet extremely complicated, right? Let me elaborate.
First, living as though you’re retired before you actually retire doesn’t mean you have the flexibility to stay home, travel, or do some of the other things you want to do once retired. You’ll still be working. However, there’s no reason you can’t begin transitioning from a working to retirement mindset, both financially and psychologically.
This transition requires careful planning though. Planning to identify retirement income. Planning to identify retirement expenses. Planning to identify retirement goals. Planning to determine how you will spend your time once retired.
I typically recommend everyone give themselves at least a year to plan for these items. However, the earlier you can start the better. Let’s take a look at each of these areas.
Pension, social security, and investment income are three common sources of retirement income for STRS Ohio members and their spouse. Whether you’ve worked hard to accrue your STRS Ohio pension, your spouse is eligible for social security, or you and your spouse have been saving to an investment account throughout your working years, it’s likely you will rely on at least one of these as a source of retirement income.
The income you will receive from your pension or social security will be fairly predictable. Income from investment accounts may be more uncertain, however, you should still be able to apply some reasonable assumptions to estimate investment income throughout retirement.
Practically speaking, identifying and quantifying these sources of income will enable you to spend your last working year(s) getting used to the fact that your income may decrease (or in some cases increase!) during retirement. In addition, proactively identifying your retirement income should enable you to begin living on that income while still working.
For example, if you anticipate your total STRS pension plus investment income to be $4,500 per month and your current take-home pay is $6,000 per month, try setting aside the “extra” $1,500 per month to a savings account. You may not be able to if your expenses are currently higher than they will be in retirement, but this will get you used to your retirement income before it actually begins.
This is the area that will likely create the most anxiety as you transition into retirement. However, allow me to suggest many retirement expenses may be accounted for ahead of time, just like you may estimate your retirement income.
In my experience, your standard of living during retirement won’t significantly decrease compared to your working years. However, because taxes may be less (not always) and you no longer contribute to STRS Ohio or another retirement plan, it may seem like you need less income to live on.
Each retiree’s standard of living will vary. One family may require $2,000 per month to reach their desired standard of living, while another needs $10,000. The important thing is you identify this need prior to retiring.
Take some time to put together a retirement budget a couple of years before your anticipated retirement date. A retirement budget enables you to identify fixed expenses (e.g. Housing, food, transportation, etc.) that likely won’t change much during retirement and also consider variable expenses (e.g. Travel, entertainment, hobbies, etc.) that you may spend more money on as a result of having more time to pursue your goals.
Considering retirement expenses well in advance of actually calling it quits enables you to make any necessary adjustments to your lifestyle or expectations while working. After all, the last thing you want to do is retire only to find out your income isn’t sufficient to meet your desired standard of living!
Will you travel more? Spend more time with kids or grandkids? Relocate? Each situation is different. And this may be the one area of planning that you can’t act upon until you’re retired. But spending a year leading up to retirement mapping out your specific goals will enable you to transition into retirement with a plan. In addition, by proactively identifying retirement income and expenses, and beginning to adjust your lifestyle, if necessary, you will better understand a realistic timeframe and value you may afford to place on each of your goals.
How will you spend your time during retirement? For some, this is an easy question to answer. For most, however, it’s not so simple since golfing, traveling, and spending more time with the grandkids will only fill so many hours!
Proactively identifying how you will spend your time in retirement is crucial before actually retiring. This process takes years for some people as they pursue hobbies they’ve never had time to explore, get plugged into an organization that affords volunteer opportunities, or experience family change that shifts their priorities.
If you find yourself feeling ready to retire yet unsure how you will spend your time, perhaps it’s best to transition from full-time to part-time work. After all, you’ve devoted significant hours of your life each week to your career and going “cold turkey” may leave you scrambling for activities to fill your time!
In my opinion, living as though you’re retired before you actually retire is the best way for a member of STRS Ohio to prepare for retirement. Spend at least a year prior to retirement trying to live on the same income, with the same expenses as you’ll incur during your retirement years. Proactively identify your retirement goals and how you will spend your time in order to minimize the anxiety many members of STRS Ohio face when transitioning into retirement. Remember, “Rome wasn’t built in a day” and your retirement plan won’t be created overnight!