I want to continue our post from last week talking about a financial framework. So, if you read to last week’s post, we talked about a financial framework for building wealth. Essentially, it has a floor, two rails, seven steps and a ceiling.
What’s a Framework
In this post, I want to continue that same vein and talk specifically about a retirement transition framework. A framework provides an overarching or umbrella for all activities compared that to a plan, a plan gives the specific actionable steps that’s involved. A framework basically consists of the major building blocks of this retirement end state that we’re trying to get to, but not necessarily the underpinnings of every detailed aspect involved.
As with all things financial, there’s a lot of nuances and details associated with these building blocks, but this will give you an overarching step by step of what to do when you are beginning to think about retiring.
And ideally, you’d want to start these three to five years before you transition into retirement.
Like our financial framework from last week, this too has a floor, and it has seven steps building up to it.
Retirement Transition is Like Landing a Plane
If you think about your financial journey, as traveling on an airplane, you kind of get in the seat, you buckle in, you taxi out and bam, you take off. That’s essentially your early twenties, late teens when you start your financial journey and it’s exhilarating and maybe a little bit scary and your kind of thrust up and you climb and you’re climbing and eventually you get to the point where you can begin to kind of level out and you’re heading to the direction of where you’re trying to go.
Now, there could be some life events that come by, like some turbulence that cause things and you might have to make some adjustments, go around storms or, change your flight path a little bit based upon circumstances.
But eventually, in your finances, you normally get to the point where your kind of just cruising along.
You’re in your forties and your fifties, you’re building wealth, you’re doing well your career, you have control of your money. And at some point, you realize that you’re getting close to your destination of retirement.
And it’s at that point you have really two different paths that you could go in terms of descending down to the ground.
You could do it like some people do it and it’s very abruptly. And suddenly, you’re at 40, 000 feet and, and bam, you want to, you want to descend and, and close that gap really, fast. You just pull that retirement lever and you just say, like the proverbial country song, you tell your boss to take this job and……
You know what to do with it!
And that that might feel really good in the moment. To kind of tell your boss off, but generally speaking from a retirement planning perspective that’s going to result eventually in being a little bit scared and a little bit sick. There might be some damage done if you if you’re flying a plane and you land it very abruptly. Very haphazardly. Very unsafely. There could be some damage either to the plane itself, to the runway, to property, potentially to your own body.
And so, that is a way to do it. But it’s probably not the best way. I mean, think about it. Would you like to land on an airplane that way?
No. Generally what happens is, you’re flying along, and you can feel that initial descent where they kind of start coming down in altitude. And ideally you want it smooth and steady and comfortable.
And you don’t want it to be very nauseating and stressful. You want it to just be very calm and deliberate. Like you have complete confidence in what the pilot and copilot are doing.
And that’s how we want retirement transitioning to be as well. Nice and smooth, nice, and steady, not stressful, very comfortable, very confident, very in control.
This framework will help you. As you begin your descent in your financial career, and you land in retirement.
Now again, just like an airplane, the, the higher that plane is flying and the longer it’s at that higher altitude. The more time it takes to get down to the ground, a plane flying at only 20 something thousand feet tt doesn’t take as long to descent to land, but if you’re flying internationally transatlantic or over the Pacific, and you’ve been at an altitude of 38, 42,000 feet for 8, 10, 12 hours, you’ll want that descent to be even more gradual. You want it to have more time to descent, and you want it to do it smoothly and slowly. Over an extended period.
And that’s why we say, ideally, if you’re executing this transition, you want to start three, ideally five years out as you are planning, because as you see here in a little bit, there’s a handful of steps that is involved. So just like our financial framework, this too has a floor, and that floor essentially is that another framework.
Comprehensive financial planning using that framework. Ideally as you go into retirement transition, you have your house paid for, you don’t have any debt, you have complete control of your money, you have good money management going on. You have a good estate plan taken care of. You have the adequate insurances taken care of, and there might be some changes to some degree, but hopefully you have most of that taken care of.
This really kind of builds off that floor. Off that comprehensive financial framework that we wrote about last post. So, if you haven’t read to that, go back, and listen to that and then come back and check out this one.
Step 1
So, what do we do first? What is the first step when it comes to retirement transitioning?
Well, the first step is to figure out what you want your retirement life to look like. And we do that through a series of exercises. We call it needs, wants, wishes.
Your needs are what are the basic things that you need from an income perspective? Because when you stop working, the income lever basically gets turned off and we need to turn on this retirement income lever over here from various sources and vehicles that we have prepared ready to go.
But the question is, how much do we need?
Well, we go through our needs wants wishes exercise. So, our needs are, what are our basic living things for our standard of living? What’s our housing going to look like? What’s our food going to look like? What do we need for utilities? What do we need for various activities we’re going to do, adventures we want to do, things like that.
What do we need from a living perspective? Some people, depending on the country, part of the country you’re in and your tax structures and things like that, you might need just 3,000 a month to cover those needs. Other people might need. 10,000. It’s going to vary. Is it one person or is it two? How long do we need it for?
We want to go through a series of exercises determining what those needs are. But retirement isn’t just about needs. It’s also about wants.
So, the question is, what do we want in retirement? We want to travel. We want to buy an RV. We want to have a second home. We want to do some giving. We want to spend time with our family.
Whatever it is that we want to do, what’s new hobbies and adventures that we want to pick up. What are the wants? The wants add the spice to life if you will. We’re not talking about just our needs, we have those covered, but these are the things that we want to do.
Retirement isn’t something boring that we’re supposed to do, it’s supposed to be an adventure. It’s the last chapter of our lives that we get to really, maybe for the first time, you have a blank slate, and you get to define what goes on. This picture that you’re going to paint called retirement. So, what are those wants that we want?
And then the last thing we want to kind of do is begin to dream and identify about what are our wishes. If money was no object, what could we do? What giving could we do? What adventures could we do? What possessions could we have? What’s on our bucket list? What’s the thing we’ve always wanted to go see and do and experience?
Now we have the time freedom and the economic freedom to actually go do. What are those once in a lifetime thing that you’ve put off for 30, 40, 50 years in terms of being responsible and being diligent, and faithful to your workplace and to your family that now you can go do.
So, what we want to do is, we want to kind of get those out of your head, out of your heart, out of your spirit, out of your emotion, get it on paper and look at it.
That’s step one.
Step 2
Step two is now we begin to quantify things that we need to build out a cash flow plan to support the needs, wants and wishes, we just identified.
We might have more money than we need. We might have less money than we need.
How much money do we need per month, per quarter, per year to sustain and achieve this life we just laid out? Now it might not all work out. It might not all work out in year one. Some of it might be in year five, some of it might be in year 10.
And so, this is an iterative process between step one and step two.
We identify what we need, want, and wish. Then we try to build out the cashflow, what it will cost, when we need money, the timing of it, and the retirement income to support it.
And we might find out we have more money so we can do more wants and wishes, or we might find out, you know, our wants and wishes are a little bit beyond what we can afford.
And so, we need to scope those down to some degree, but we can change the needs and have some of the ones and do some of that trade off conversations. And so again, these two are very iterative in nature.
Generally, we use two different tools from a financial planning perspective to build out those cashflow plans.
One is a forward-looking tool. We enter all those needs, wants, and wishes in based upon the assets that we have, the income sources that we have. And we kind of project out based upon market returns and do something called a Monte Carlo analysis. And what is our probability of success. Are we going to make it or are we going to fail all the time? Where’s our comfort level as to how we’re doing?
The other tool is essentially looking backwards. So, we take all our future needs, wants, and wishes all our future income sources, and we push those out based upon inflation and we kind of total those up and bring them back to today’s dollars from a balance sheet perspective.
Here’s what we need. Here’s what we have. And we see where we are. Do we have an adequate funding amount? Are we constrained? Do we not have enough money to do that? Or are we overfunded? Again, we can kind of go back and revisit some of those needs, wants, and wishes.
Those two steps there generally are going to take you a lot of time because your needs, wants, and wishes are going to change.
You’re not going to do it one time and then that’s it. It’s going to evolve over time.
Which then brings us to step three.
Step 3
Step three is to built out a non-financial plan, a non-financial plan.
So historically, when you’re raising a family, when you’re working, time is constrained. You don’t have a lot of time as the kids leave and transition out and you become empty nesters.
Generally, you have a little bit more time, but you still have work. And most people work 40 to 45 hours in America plus commute times. Which for some of you who are maybe remote, you don’t have that as much, but there’s getting ready, there’s coming home, there’s decompressing, all those types of events.
And so, our careers and our jobs still take up a large amount of time while we’re working. Even though we don’t have the, the kids’ activities and these activities and all those kinds of things. We still have a lot of time absorbed by our work.
Well, when you begin to transition or when you transition, should I say.
And your work goes away, and you have a lot of time.
One of the things that I like to help people who are transitioning into retirement is to say that in retirement, every day is a Saturday. Like, if you think about it when you work, you know, Monday through Friday, generally the alarm clock’s going off, you’re getting up, you have a routine, you’re going about doing what you’re doing.
You go to work, you come home, you fix dinner, you have a couple hours to do whatever you need to do, you go to sleep, and you rinse and repeat every weekday.
But what happens on Saturdays? On Saturdays, generally the alarm clock doesn’t go off. Generally, you can sleep in on Saturday. Saturday is an empty slate.
You can wake up and go about doing whatever it is that you want to do. Most people do their shopping on Saturdays. Historically, Americans spend more money on Saturdays than any other day of the week because it’s the day they go to the grocery store. It’s the day they run their errands. It’s the day they do purchases, go to the mall, do events, things like that.
Well, when you’re retired. That’s how every day is.
Every day is like a Saturday. There’s no alarm clock unless you choose to set it. There’s nowhere you must be unless you choose to make an appointment for such. And you can go do whatever you want to do whenever you want to do it just like a normal Saturday.
Well, the thing is… If every day is like that, you’re not used to that. And so, you have this big void of time now that you must fill.
And where a lot of people struggle when it comes to retirement transitioning is they’ve never really thought about that. They just think, hey, I don’t have to work. That’s all I care about.
Well, the question is then what are you going to do with the rest of your days?
This helps you be intentional, thoughtful, purposeful about what you’re going to do with your time. A lot of retirees go through a mild to somewhat for some, or maybe one of the worst of their life state of depression. Because if you think about it, for a lot of people, their work is a, is a sense of commitment and responsibility.
You have your social interactions there. You’ve kind of built your life around it to some degree. That dictates, when you go to work and when you leave, and so you kind of build your life around that.
Well, when that goes away, a lot of people don’t know what to do with that time.
For some people, their identity is wrapped up in that. You know, we say, hey, my name is Mike. What do you do? Oh, I’m a financial planner. What do you do?
It’s one of the first topics we talk about when we meet somebody because it’s, it’s kind of a big portion of us for most people, especially for guys, more so for guys than, than for ladies, it’s our identity and no, we’re no longer the….policeman, the maintenance manager, the airline pilot, the banker, the construction manager, the accountant, whatever it is that you’ve done.
When you’re no longer that, what do you do? I’m retired. Well, that’s a great thing to do too. But the question is what’s that retirement going to be? Most people say, oh, I’m retired.
Well that doesn’t sound very exciting, so what do we want to do with our time?
What’s new hobbies we want to do?
What’s new activities we want to do?
We get to reshape our identity. We get to add new purposes to our life. What kind of ministries or volunteering efforts do we want to get into?
You have so much time now to do the things that you want to do. But the question is, what is it?
And so, step three in terms of building out that non-financial plan is going to help drive those things out. So, this too is iterative to some degree back to step one, because as you begin thinking about those non-financial things of time and activities, hobbies, identity things like that, those might have a cost.
So, we might have to circle back around to step 1. Oh, I didn’t realize that this hobby that is going to get into costs as much as it does. I didn’t even have that on my one on my list. So now I want to build that in, which changes our cashflow plan and so on and so forth. So really steps one, two, and three are iterative in nature, meaning that they’re not just done once.
Your kind of do it. You reflect on it; you change it and you come back around.
And the reality is you’re going to kind of somewhat do that all throughout retirement.
But at least having a good solid plan going in helps you identify what you want to do. And ideally if you’re going to have those cash flows laid out for the first five years, knowing what you need and where it’s coming from.
It will serve you very well because you would then have a track to run on. Just like that descent.
We just don’t want to haphazardly come down nice, smooth, and slowly so that a pilot knows, Hey, I’m a hundred miles away. I need to be at this altitude and this speed 50 miles an hour. I need to be at this altitude and this speed.
Two miles away. I need to be at this altitude and this speed, it’s very intentionally planned.
The same thing is done here. Where’s your money coming from? When do you need it? Where is it going to go?
Which leads us to step four.
Step 4
Step four then is where we arrange our Retirement income, so depending on your situation and everybody’s different. You’re going to have various vehicles or assets that you’re going to use to produce the income.
When you’re working, generally you’re building up this nest egg and you have this income.
Well, when you turn off the job and the income go away, we must turn on some spigot because everybody needs an income, regardless of you’re working or not.
You still need income. You still have bills that you must pay. So, we must create a, what’s called a retirement income for you.
Well, what are some various sources? It could be a whole bunch of things.
For most people, social security will be involved. Depending on your working career. Some people have pensions, so government workers generally have pensions. Large corporations from if you’ve been there for a long time have pensions.
Some organizations have pensions. If you think like railroads and things like that. Utilities to some degree have pensions. So, some people might have a pension income.
Now for those who are retiring more and more. Companies stopped doing pensions in the early eighties. And so, pensions kind of went away for a lot of people. And so, it was replaced with defined contribution plans or 401Ks, 403Bs, 457s, Thrift Savings Plans, things like that. Various accounts that you could put money into to build. So, you could have those.
You could also have individual. Retirement accounts, IRAs that you set up either pretax traditional or Roth IRAs or rollover IRAs where you’ve moved money over time.
So, you have those at your disposal. Maybe you have passive income dividends from some sort of stocks that you own.
Maybe it’s options that you had from your company.
It could be rental real estate that you have or business ownerships that you have.
So, all those would get brought into consideration. It could be part time jobs as well. Maybe, maybe you’re not retiring completely and completely shutting off the spigot.
You’re just going down to part time or maybe you’re going to start a new business, a new venture, an encore career, if you will, that you’ve always wanted to go do.
So, what do we have to do? We must line up all those incomes to know when they’re coming in, how much is going to coming in.
It supports that lifestyle and that cashflow that we built out in those earlier steps.
Once we explore all those different assets and vehicles you have, we must figure out, Money for year one, which vehicle or asset are we going to tap into?
Money for year two. Which combination of vehicles or assets are we going to tap into? What account is the money coming from? And we need to have them positioned so that they are ready to go, which leads us to the next step.
Step 5
Step five. which is what I call practice retirement.
And this is, again, is going to be very different based upon your life situations. But one of the things that everybody can do is they can begin practicing the hobbies that they want to begin to get into. So, we talked about that non-financial plan and step three.
Well, this is where we can explore to what level do we want to get involved? How much do we want to get involved? When let’s begin practicing it. Let’s get associated with people who do that thing. Whether we must buy our way into it, get a coach. For example, if you want to learn tennis or golf, you might get a coach.
If you want to go get into fishing or hunting, you want to maybe join a club that does those things.
If you want to get into woodworking, for example, some men like that, some ladies like crafts, there’s all kinds of sewing and quilting clubs and, and all kinds of things like that, as well as volunteer things where you can get involved with those.
So, beginning to reach out and getting those connections and begin practicing it so that, because what you think you might want to do, you might not really like it.
Another way you can practice with retirement is that involved with setting up that systematic paycheck.
Depending on where you work. Some people get paid every week. Some people get paid every two weeks. Some people get paid once a month. Depends on their company or their business.
Well, now you might want to continue that. You might want to get paid every week like you did before. You might not. Most retirees set their incomes up where it comes in just one time a month.
They must manage that for the month, and you know it works. Some people do it too, just depends on their social security timing, but it’s up to you.
You can practice that well, you can simulate that before you retire. Where and when we get to money management, we’ll talk about this.
You know, managing money like a retiree using the non-budgeting budget system. I know that’s a handful of words, but the non-budgeting budget system, which is where you simulate yourself where you only pay yourself once or twice a month, like you would from a retirement accounts, but you do it from savings instead.
You set your paychecks are going to your savings and then you can control when those. Transitions or those transfers are coming into your check in account. That’s a way you can practice.
You might have the ability to take a sabbatical or an extended vacation.
If you’re married, you might think the idea of being alone in your house with your spouse 24 hours a day will be great.
Until you do it.
And then you might not like, whoa, this is just too much, or it may not be right, but you get to, you get to test it.
You might think the idea of living in a camper going around the United States and into Canada, maybe down to Mexico will be great. We’ll go do it for a month and then you might realize, eh, I don’t really like this. This is too small. I don’t know. I’m not saying you will. It could be, hey, this is great, but you know what?
Now, now you’ve practiced it a little bit. Now you’ve experienced it a little bit so that you can really test and validate, hey, I really am looking forward to this and it just might whet the appetite to make you want to retire sooner.
Or it might, it might make you throw the brakes a little bit and say, hmm, we might have to go back again to do some of that non-financial planning things and try to determine, is this really what we want in life?
So, practice, don’t make those herkie jerky decisions. Ease into it, be intentional and try to practice as best you can.
Step 6
Step six, this is the easiest one, which is Retirement transition where you kind of set the date on the calendar. You get ready to pull the lever, but you’re thinking about it from a timing perspective from a calendar perspective.
Different careers have different seasonal work, so it might be Hey, I want to leave at the end of the year, December 1st for accountants and stuff. It might be more may after, after tax season is done for people who do a lot of work outside seasonal stuff in the summer. The end of the summer might be the best time to kind of pull the lever.
It’s going to be different for everybody. It’s going to be different between the timing of you and your spouse.
Are you doing it together as one going first, then the other one. How’s that going to work out? It’s ensuring that we have the new health insurance. If our health insurance is tied to work, which it is for most people, do we have that set to go? Because you can’t just turn on Medicare, you know, basically in one day, there’s a couple of months involved with that.
For example, if that’s what you’re using same thing with getting healthcare from the exchange various things like. From a work Responsibilities perspective right you have to finish up some projects or make some transitions with the new person taking your job.
There might also be timing of your income right so you might set yourself up in the first part of the year, where you can retire, I’m just making this up, maybe in July and you have enough income and savings that’s going to last you the rest of the year.
So, you don’t have to pull any things until the next year. So, if you’re timing, for example, you’re trying to time your 59 and a half mark, maybe you wait till your 60th year where the 59 and a half you have savings. And then you’re executing your retirement money where you’re pulling from a 401k or an IRA at age 60, there’s all kinds of timing elements that’s involved with that as well.
So, picking a date on the calendar, once you have everything kind of lined up.
Again, it’s intentional, it’s purposeful, it’s smooth, it’s, it’s not stressful, it’s not herkie jerky, it’s not reactive.
It’s very, you know, very, very peaceful, very controlling, very confidently. That’s what we’re trying to do here. We’re trying to transition into retirement with confidence.
Step 7
Which then leads us to step seven. So, if you have done this stuff where you have laid the foundation, your house is paid off, you have no debt, you have that emergency fund, you’ve been saving and investing all along the way. You have the. The financial framework set, and you’ve taken the time to go through intelligent, purposeful, diligent planning and work through all these various steps.
You know what seven is? Seven is go live that retirement with, with joy and with gladness and with blessings on it. Step into it. Be uncomfortable. Go do those things that you want to do. You only get one life. This is the time you’ve put it off for so long.
Have the courage, have the unction, have the boldness to step into it and live this stage of life.
You have worked hard, and you deserve it. You know what you need to do now? Now you need to go live it. You need to execute it.
You need to step into it with vigor and energy and emotion and passion. Do it.
Don’t just sit on your couch and watch TV. Unless of course that’s intentionally what you want to do.
If that’s what you said you wanted to do all your life, the freedom to sit on your couch and watch TV, then that’s great. Do that with energy and vigor and excitement and unction.
But if it’s not and you want to do something else, go do it.
Go take those trips, go travel, go do those activities, get involved with those clubs, do those things that you’ve always wanted to do.
Because when at some point we’ll do another post on the retirement years, there’s really three phases to retirement.
We call them the initial one, which is kind of the go-go years where you have all this time, freedom, all this economic freedom. You still have your health, you’re energetic and right. It’s the go-go years.
And then we come down to, and you get into those slow-go years where, you know, you don’t, your health’s not as good. You’re slowing down a little bit. You know, you have a lot more doctor’s visits and things like that.
And your kind of just slow down a little bit more and then you have those later stages, generally the last year or two in retirement where it’s kind of no-go years where maybe you’re in bed, maybe you’re in a wheelchair, maybe you’re in a home, maybe you don’t have all the functionality that you once did.
Enjoy those go-go years. If you’ve done the planning, if you’ve done the hard work if you have the money,
Go live your retirement dreams because you only get one shot.
Conclusion
There you go Seven steps to transition into retirement:
- Needs wants and wishes
- Build that retirement Cashflow plan ideally for five years
- Build out that non-financial plan
- Arranges the income, so it’s all set up
- Practice retirement,
- Set up that retirement transition where we pull that lever.
- And when you get to that point, go live your retirement dreams.
Again, there’s a PDF summarizing these things that you can print out and utilize and visualize and use for your own planning.
If you want, you can find it on the resources page. You’ll see it retirement framework PDF.
If you have any questions, please feel free to send them to me at Mike@true wealth.show.
And as always, thanks for taking the time to listen in, and until next time, I hope you have a great day.
