You can enter retirement with more confidence and certainty than most retirees. Retirement planning has many projections, forecasts, and assumptions. In other words, there’s a lot of uncertainty in every retirement plan.
In addition to the financial issues, many people retire either uncertain about how they will spend their time or with untested assumptions about the activities they’ll enjoy.
You can end much of the uncertainty and test many assumptions by establishing a retirement internship or doing a simulation. With these exercises, you put into practice your assumptions about spending, get a taste of the retirement lifestyle, and learn more about how you’ll enjoy spending your time. You can do all this without letting go yet of much of your pre-retirement life and income.
One of the great uncertainties is how much you’ll spend each month in retirement. Many people find it difficult to estimate retirement spending or imagine the lifestyles they’ll have in retirement. Some aren’t keeping good track of how they spend money now and don’t really know where their money is going. I discuss the best ways to estimate retirement spending in my books.
One solution used by some financial advisors is for people to spend a year or more living on their estimated retirement budgets while they still are working. Suppose you estimate needing $5,000 monthly in retirement. Test that assumption. Set up a new checking account. Put $5,000 per month in the account. Spend only from that account for a year.
You can make some adjustments. For example, you might plan to pay off a mortgage before retirement but it’s still in place now. You can pay the mortgage from your current checking account. But be sure to deduct from the new checking account some expenses that might be folded into the mortgage payment, such as insurance and real estate taxes. There also are likely to be some expenses automatically deducted from your checking account. These need to be reimbursed from the simulated retirement account. You might need to make other adjustments based on your circumstances.
This simulated retirement ensures you know what it’s like to live on that fixed amount of money. It also could uncover surprises. Some people assume in retirement they’ll reduce or eliminate some spending from their working years, but they find that harder to do than they realized. Others learn for the first time how much money they’re spending each month. A lot of small purchases and entertainment items are revealed.
At the end of the year, you’ll know if adjustments need to be made in your retirement plan or if you’re on track. The simulation isn’t perfect, because you aren’t retired. You’re still going to work and don’t have all those extra hours to fill. You also have work-related expenses that won’t exist in retirement. You need to adjust for these as much as possible in the simulation. Also, large periodic expenses such as repairs for homes and autos, might not occur during the year.
The simulation can be a real confidence builder. It’s not easy to go cold turkey from working full time to being retired and without a steady paycheck full time. The exercise let’s you transition into retirement and prepares you both emotionally and financially. It’s a good idea to do the simulation a few years before you expect to retire, so you’ll have some time to make adjustments.
Another approach, which I call the retirement intern-ship, is to begin easing into your retirement lifestyle without actually retiring. Don’t make an abrupt shift from your full-time career life to your full-time retired life. Use your 60s as a transition period to full-time retirement.
In this internship, you continue working and earning a salary. You also aren’t taking Social Security or spending retirement assets. But you might stop or reduce contributions to your retirement savings. Instead, you spend some of that money doing activities you plan for retirement. These activities could include travel, developing new hobbies, and anything else on your agenda.
With the internship you are able to enjoy a range of activities during your 60s when most people still are relatively healthy and active. You’re not waiting until your late 60s, 70, or beyond. You’re still receiving a paycheck and your retirement assets are compounding. You make use of evenings, weekends, and vacations to enjoy some of your retirement activities.
There’s often no real reason to have a bright line between career and retirement. Like work internships for young people, the retirement internship lets you sample the lifestyle you’ve imagined and lets you know if you’d really enjoy that lifestyle before you commit to it. You can experiment, trying some different things and easing your way emotionally and mentally into retirement living.
The internship also can make you more financially secure. You can reduce contributions to retirement plans and use that money to pay down debt or make other financial preparations for retirement such as fixing up the house or buying the recreational vehicle or other accessories you think you want for retirement. With the intern-ship you don’t have to wait until financial independence is reached before enjoying parts of the lifestyle.
The mutual fund firm T. Rowe Price has a trade-marked program it calls Practice Retirement that you can find on its web site, giving its version of the retirement internship.
The retirement simulation and internship have multiple benefits. You’ll learn just how accurate your financial preparations are. You also benefit from a transition period instead of experiencing an abrupt change. The exercises should reduce much of the uncertainty and anxiety about retirement, plus you’ll have more fun and enjoyment in those pre-retirement years.