If you look around, almost everything you see—from planets to people—is made to work as part of a system. Take the human body for example. It has the skeletal, nervous, circulatory, muscular, and digestive systems, just to name a few. All of those separate systems are brought together to form the incredibly complex human body. If your circulatory system quit working or your skeletal system suddenly disappeared, your body couldn’t function. Each part plays an important role.
What does this have to do with retirement? Quite a bit actually. The typical retirement has a lot of moving parts; things like your finances, health, family, and housing to name a few. Those parts work together in a complex system. If one of those areas isn’t functioning properly, it creates problems.
If your finances are a mess, will that impact your retirement? Absolutely. How about your health? Yes again. Ditto for things like your relationships with friends and family. Just like a broken transmission will affect how your car runs, problems with these areas will impact how your retirement runs. So here’s my point:
If you want your retirement to function properly, you need to be system thinker.
You need to put effort and thought into every key area of retirement if you want the overall system to function well. What are some of those key areas?
Money—If I ask you when you want to retire, your answer should be a dollar amount, not a year. Retirement is about independence, not simply age, and money is critical to independence. You should know exactly how much you need to save in order to fund the type of retirement you want. That means creating a detailed retirement budget and knowing how big your nest egg needs to be to spin off the needed cash. A common rule of thumb is that your savings should be twenty-five times larger than the income you want it to produce.
Pursuits—Money is important, but only as a facilitator. You need it, but you also need to have plans for it. I’ve written a lot about this idea in my books and elsewhere on the site, but it bears repeating: Before you retire, you should have very specific plans for what you want to do. In the near future I’ll be doing a post on creating the ultimate bucket list. Stay tuned. In the meantime, you can read this and this to get some ideas on making the most of your time.
Family and Friends—You need to be on the same page with your spouse before you retire. Here’s a handy checklist to guide your conversation. Also, don’t forget your kids. They’re probably grown and out on their own, but the plans you make will likely impact how often you’re able to see them (and your grandkids). The same is true of your friends. Keep that in mind.
Location—Are you planning on moving or staying put during retirement? That decision will affect almost every area of your life. Here’s an article with things to keep in mind.
Distribution Strategy—Transitioning from accumulation to distribution can be tricky. Taking too much, too soon from the wrong account or in the wrong markets could be the difference between retirement bliss and retirement blunder. For your system to function properly, you need a well thought out, sustainable distribution strategy.
Your health—Since 1950, the average retirement age has decreased by about five years and the average life expectancy has increased by more than a decade. If you want to take advantage of those extra years, it’s a good idea to take care of yourself. Nothing spoils your dreams faster than a heart attack.
Insurance—You’ll likely need hundreds of thousands of dollars (in addition to Medicare) to cover your health care costs during retirement. Make sure you have appropriate health insurance and long-term care insurance in place to help offset those costs.
Social Security—There are no “one-size-fits-all” answers when it comes to understanding Social Security benefits and how best to incorporate them into your overall retirement strategy. Work closely with your spouse, adviser, and local Social Security office to determine how best to claim your benefits. You can also pick up a copy of The Bell Lap (where I discuss the topic extensively) or visit the Start Here page where I’ll post ongoing articles about Social Security.
As you can see, all of these areas come together to form a complex system during your retirement years. Handle each area properly and the system will function well. Handle them poorly and you can expect problems.
After looking at the list, is there an area you need to focus on? Let me know if there’s anything I can do to help.