Approaching retirement: What now?

Retirement, that magic day you've had in your sights for decades, is finally coming into view. You may be in your 40s or 50s, and the big day may be next month or in a few years. Whatever your age and whenever the day, the time is coming for the big question:

What do you do now?

What to do in retirement?

I faced that question a few years ago, and I remember it well. My first reaction was terror. This is so final — you can't turn back the clock and you don't get any do-overs. (How many times I wished for just one!) All my bad decisions had grown up around me (or not grown, to be more accurate). Now, I was faced with two pretty large questions:

  • What income will I live from?
  • What will I do with my time?

What will you do in retirement?

You might think the first of those two questions would have been my main retirement focus; but in hindsight, the second is even bigger. It's that age-old question: What are you going to do when you grow up?

Many people never give much thought to that question as they furiously run the rat race, focused on making payments, raising kids, keeping up with various Joneses, and generally “making it.”

Step back for a moment, though, and try to imagine what will happen. The first day is just like every Sunday. You wake up with no alarm, and do whatever you consider is fun to do. You don't have to get dressed and rush off to work. After a week or two, though, it begins to sink is: This is different — it's Sunday every day for you now.

How will you fill your retirement days when the novelty wears off?

It's easy for many to dismiss what has become the Leisure World image: fuddy duddies in plaid pants and white belts riding their golf carts around the course, while the wives gossip and play bridge with the other members of the blue-rinse set.

But, what will you do that's different? You can gallivant across the globe like J.D. Roth, but the reality is that most of us are probably not going to retire with that much money or that much of an adventurous spirit. I've asked many people in their 30s and 40s what they will do once they retire — and you'd be amazed how often I get a blank, deer-in-the-headlight look back in response. It's a lot like Art Linkletter asking those little kids what they'd do if they were president. (One little girl famously said she'd order husbands to kiss their wives a hundred times a day.)

Most of us simply don't know how we will pass the time in retirement. It took me a few years after I stopped commuting for a paycheck to figure out what I really want to do. What I looked forward to on weekends wasn't enough to engage me for 16 hours a day. (Oh, that's right, when you retire, you have 16 hours a day to fill, not just eight.) A couple we know from California simply stay at home and putter around. He recently confessed that they bought his wife a new car, but after three years it only has 3,000 miles on the odometer. (This is in Orange County, California, where public transportation is non-existent, so those are pure stay-at-home miles.)

There are many people who want to retire early, without defining what they want to do when they retire. They end up simply getting another job because it's all they know.

So, the first thing you need to spend some brain time on is to figure out what you want to do when you no longer have to grind out a living. For me it was writing — something I had no clue I'd ever want to do until my mom idly remarked that my sister is so gifted with writing, what a pity nobody else in the family caught that gene. Ha! Sibling rivalry being what it is, I took up the challenge; now I'm the writer, and she's still figuring out who she wants to be when she grows up.

But this is Get Rich Slowly, not Get Old Slowly, so let's talk about the money for a second.

Structuring what you live from

No, this is not the standard lecture that you better start saving because old age creeps up on you faster than Speedy Gonzales; that's a topic all to itself.

If you've been smart and availed yourself of 401(k) or similar retirement plans wherever you worked, and you changed jobs along the way, you may have accumulated a motley collection of retirement accounts: 401(k), Roth IRA and regular IRA.

Now the question is: What should you do with that assortment of nest eggs? Should you consolidate and simplify your budding financial empire in preparation for your freedom years?

Short answer: Yes.

Why?

The human mind has a hard time keeping up with complexity: Restaurants with complex menus lose customers. Are you on top of all your multiple accounts right now? Probably not. It'll be much easier if you just had two or three.

How do you consolidate?

For starters, get out of all your 401(k) plans and roll over the money to an IRA account. You may not be able to do that with your current employer, but you're allowed to do that with inactive 401(k) plans.

Why roll over to an IRA? Two reasons:

1. Returns: The standard most mutual funds aim for is the S&P 500 average (around 8 to 9 percent per year, depending on which dates you pick). Now, that being an average, you would expect half of all mutual funds to beat that, wouldn't you?

You would be wrong. Fewer than 25 percent of all mutual funds beat the S&P 500… and it's never the same bunch. Therefore, odds are your 401(k) funds underperform the S&P 500.

You can do better by rolling those over into a single IRA and investing it all into an S&P 500 index fund. Please note: I'm not saying an index fund is the best you can do, only that it's one simple action likely to improve your returns.

2. Fees: Most 401(k) plans charge fees which eat away a significant portion of your earnings. Most plans are captive, meaning you, the employee, can't choose just any mutual fund you want — you can only pick from the menu they offer you. And all of those mutual funds have a management fee.

Not only are you stuck with mutual funds which charge you a fee, but the 401(k) plan itself has plan administration fees. They may be hidden, but you're always paying two layers of fees with 401(k) mutual funds. Both sets of fees eat away at your returns. The way they quote those fees makes it sound like they're small, like 2 percent or something like that. Considering the return before fees (at best) will be something like 9 percent per year over the long haul, that 2 percent ends up being more than 20 percent of your earnings. To get a better idea of the magnitude of the fees, you need to divide the fee by the return. When you do that, they're not so small anymore.

You can get a self-directed IRA account for free at most online brokerages, and you can pick any mutual fund you want. (You are not limited to your employer's menu.)

But that's not all. You can invest in any individual publicly traded stock you want, too. So, if you think Warren Buffett's Berkshire can earn you more than that S&P 500 index fund (and it has for decades), you have the option to invest that way.

With your own self-directed IRA, then, you can significantly increase your earnings over those inactive 401(k) funds from previous jobs. Which brings up the next question:

Roth or regular IRA?

This decision is mostly driven by tax rates:

  • With a regular IRA you pay tax in retirement on what you draw.
  • With a Roth IRA you pay taxes now on what you put away.

(In both cases, the appreciation and income accumulate tax-free.)

As an example, if you're really raking it in now and plan a fairly low-budget retirement, then a regular IRA makes more sense, because the deduction happens at a high tax rate, but the monthly draw will be taxed at a lower rate. On the other hand, if you're scraping by now (and pay a low tax rate), you have nothing to lose by picking a Roth IRA. If you strike it rich, your income from that will be tax-free; and if it's as middling as you make now, you haven't lost much. (Editor's note: Roth IRAs have income limits, so check with the IRS to be sure you're eligible to contribute.)

Because the critical variable is your tax rate, now and in the unknowable future, it's worth the money to pay an adviser to look at the variables of your personal situation and get some informed and professional advice.

General questions

What about diversification? Someone asked me if he should leave his multiple 401(k) plans in place to diversify away his risk.

In a word, no. There are many ways to diversify within a single IRA. What is more diversified than an S&P 500 index fund, for example? So you can have all your money in one place, easy to manage, while your investments are highly diversified.

What about real estate? Good question. Rental property doesn't grow tax-free like an IRA or 401(k) fund, but it has the potential to be more lucrative. However, it's not nearly as passive an investment. You have to get tenants, keep up with maintenance, and deal with late payers and those who destroy the property. It does have the advantage, though, of probably being much more inflation-proof than paper investments.

Retirement (however you view or define it) is as profound a life change as leaving home, marrying, or having kids. And it has as many opportunities to screw it up. Fortunately, though, you have more notice and more time to prepare.

The trick is to make use of that time. What are you doing?

More about...Retirement

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Clara
Clara
5 years ago

If you roll over a qualified plan to a Roth IRA, there are taxes due now so the plan can grow tax free later. May not be a good option for an earner at the top of their earning potential.

Also: you can invest in real estate and other alternative investments through an IRA to create a truly diversified investment portfolio. This type of IRA is generally called a self-directed IRA, so when I saw William’s reference to a self-directed IRA I thought he was going to provide some information on that.

Brian @ Debt Discipline
Brian @ Debt Discipline
5 years ago

A good reminder. You need to have a plan when retire. What things/activities will fill you time now? I believe too often people retire and are in shock from the void that is left from leaving their day job after so many years.

NicoleAndmaggie
NicoleAndmaggie
5 years ago

Great post!

As for retiring, I hope not to do that unless disability sets in!

Barb
Barb
5 years ago

I’m always amused when people say this, although I often think it’s said with a healthy dose of humor. Generally, I expect that they have a wrong image of retirement, or that they have no interests when it comes outside of work (not talking about the posters, just in general) As someone who was forced out of work after carrying for a terminally ill husband and never went back, I can honestly say that I wonder how I ever found the time to work. And I now longer have children at home. Unlike the author, I have never wondered what… Read more »

AZ Joe
AZ Joe
5 years ago

In his book “Your Money or Your Life” Joe Dominguez devotes chapter 9 to: “Now that you’ve got it (FI / retirement), what are you going to do with it?” He talks about productive use of your retirement in a way that is good for you. I found his thoughts and ideas very helpful when I retired at 55, 11 years ago.

I might add, his book was the impetus for my plans and efforts leading up to retirement. While not the only resource and information, the concepts and FI principles in his book were life and game changing for me.

Debi
Debi
5 years ago

I’m about 3 years away from retirement and have such a long list of things that I’m looking forward to doing that I can’t imagine being bored or going back to work just to have something to do. Just having enough time to do all the day-to-day living chores at will instead of spending the weekends doing them sounds like heaven. Then there’s grandchildren to spend time with, friends to catch up with, concerts in the park, painting the insides of all my closets, exploring the county parks, the list is endless. I can’t wait! Oh yeah, we were financially… Read more »

Scooze
Scooze
5 years ago

Love the posts about retirement! Thank you. Is William a new staff writer? This is great – I look forward to many more posts like this. I would love to hear how someone actually starts to disburse their money or pay for a gap before social security kicks in. Anyway what to do in retirement is such a great question. I would personally love to keep my job (which I enjoy) but do it only 50% or 75% time – have my summers off for travel. That would be ideal, but I don’t know if I can find a way… Read more »

Debi
Debi
5 years ago
Reply to  Scooze

If you liked this post you might want to check out William’s blog Bite The Bullet Investing. Investing ABC’s laid out in a fun, easy to read format.

Scooze
Scooze
5 years ago
Reply to  Debi

Will do. Thanks!

Barb
Barb
5 years ago
Reply to  Scooze

While I do not have my old job (obviously) my choice was to freelance, and take on only short term projects. I’m primarily a researcher, plus I sell quilts on the side. I rarely work during certain times of the year, when I travel and work more intensively other times. FWIW, I think an article on the medical gap for early retires is worth an article. While I have federal health insurance, I know many people and bloggers who were spending in the tens of thousands just for cobra coverage without the copays. My understanding is that this is one… Read more »

imelda
imelda
5 years ago

Are you suggesting that people in retirement invest the bulk of their funds in a stock-market index fund? Isn’t that absurdly risky? Also, I’m not sure why you left out people in their 60s in your intro paragraph (“you may be in your 40s or 50s”), given that they will be the vast majority of people preparing to retire. Also, my mom just retired, and most of her time is spent in taking care of my dad, who is ill. A huge number of people retire for health reasons, either their own or a family member’s. Having enough to do… Read more »

Scooze
Scooze
5 years ago
Reply to  imelda

I would be interested in other perspectives, but I believe that its okay to have a lot of your money in the stock market (index funds) as you get closer to retirement – you really only need to have funds in safe, accessible vehicles that you will need to use for the next five years or so.

imelda
imelda
5 years ago
Reply to  Scooze

I guess we all have different risk thresholds. But a 5-year span seems very liberal.

Lots of people who were getting ready to retire lost a lot of money in the 2008 crash. I have heard they are just starting to recoup their losses? (those who didn’t pull all of their savings out, that is)

Personally, I would want at least 10 years’ time to recover from dramatic losses in the stock market. And even that is assuming that the stock market will always recover. 🙂

Here is an interesting, if sobering, article: http://www.cbsnews.com/news/retirement-dreams-disappear-with-401ks/

Debi
Debi
5 years ago
Reply to  imelda

At the end of 2008 my net worth was 28% less than what it was at the end of 2007. I did not panic. I did not sell out of the market. I continued to save and invest as if nothing was going on. Today my net worth is 51% higher than before the crash and 111% higher than the end of 2008. People who did not panic have done VERY well post 2008 crash. I’m so glad I took the advise that many, many financial experts with more investing experience than I were handing out: Stay the course, don’t panic, buy, buy, buy.

Alea
Alea
5 years ago
Reply to  imelda

Imelda, your 10 year span is quite right.

In INDEX INVESTING FOR DUMMIES, Russell Wild recommends that a person should have 10 years worth of living expenses in bonds. For example if you need $30K a year income from your investments, then one should have $300,000 in bonds, and the rest in equities.

Lisa
Lisa
5 years ago
Reply to  imelda

For the 10 years in bonds conversation — is that bonds bonds? or bond mutual funds?

getagrip
getagrip
5 years ago
Reply to  Scooze

When you have to live off the money and not just “ride it out” it is different. There are significant risks if you are relying on drawing down the money for living expenses every year from a 100% equity nest egg, as people who were actually living that way found in 2007-2009. That is why a number of advisors typically recommend some type of bucket strategy where you have some number of years of cash equivalent set up as part of your nest egg to ride out the down years and not have to touch the equities until they have… Read more »

Alea
Alea
5 years ago
Reply to  getagrip

Lisa, in the book he talks about bond funds, but I am sure that individual bonds also apply.

Getagrip, you are correct, the bucket strategy is also a good one. Two years worth of cash, no debt, bonds that covers the next five years, and then another bucket with bonds for the other five years, buckets with equities, etc. Porfolios should be well diversified so when 2008 happens the bottom does not drop from having everything in just one bucket.

getagrip
getagrip
5 years ago

Consolidating your 401K’s is a good idea for the reasons provided. However, the assumption you are currently invested in just mutual funds so you should put 100% into the S&P 500 when you retire and consider yourself diversified does not sit well as advice.

olga
olga
5 years ago

I am moving to a mountain town in 5 years and semi-retire. I will not work 8hr/day anymore, but will work part time on sliding schedule as a Massage Therapist, I will take yoga classes and will teach yoga, will start a garden, will hike a lot, will drink morning coffee at a local shop with neighbors for an hour, I will knit a lot of sweaters and hats and whatnot and try and find a better market for them than I do now, and I will write, and may be still train for my 100M running races with more… Read more »

Barb
Barb
5 years ago
Reply to  olga

Ha! I love someone who has ravelry at the top of their side links. I swim, I walk, I quilt, I knit, I volunteer at a community theater, I feed homeless women, I go to the movies in the middle of the day when no one is there, I belong to a dinner a and a movie group, I have no shame whatsoever about sitting on my patio with a drink and reading an entire book in a day. I write, I design patterns and in the past month I have taken road trips to Santa Fe and Taos and… Read more »

M
M
5 years ago

Very timely for me! I believe I am about two years from relatively early retirement, and what’s struck me as odd is the emotional fall-out of such an event. My DH and I have done a lot right and we’re in great financial shape but it’s taken a bit of a toll on our emotional lives. Like, where did all that precious time go?? And who is that old chick in the mirror even though I feel like a teenager? William, I’m glad to hear you took some time to process your experience. I can similarly be patient with myself.… Read more »

DealForALiving
DealForALiving
5 years ago

I’m still a decade or two away, but have been spending a lot of time thinking about retirement. I’ve gone back and forth on how much to put in m 401k because I don’t like the idea of postponing enjoyment for when I’ve got a head full of grey hair.
I’d hope that I can afford to retire in dignity in a small condo with a mountain or water view.

Laura
Laura
5 years ago

What will I do with my time? I’m only 52, but I’ve got a plan! First, I will go through Dave Ramsey’s Financial Counselor training, and use that to help people get their financial lives figured out. Second, I’ll continue to do taxes, probably full-time during tax season (it’s a part-time job for me now) for many years after retirement. Third, I’ll enjoy all of the crafts that I love to do and have no time for now. Fourth, I’ll spend lots of time with my grandchildren. Fifth, I’ll do a little traveling, but not a whole lot, because frankly,… Read more »

Ely
Ely
5 years ago

I think when younger people give you the deer-in-headlights look it’s because we can’t imagine retiring. We’ll never have the money or the freedom to quit work in the way our parents and grandparents did.

All the retired people I know are busier now than they ever were before. They spent a few weeks in shock, but then travel, grandkids, and hobbies exploded to fill their days. I haven’t seen my dad in months and we live in the same town.

Adam P
Adam P
5 years ago

My parents are both over 65 and neither of them (nor their spouses) have any plans to retire, ever. They just want to keep on working and don’t have money set aside even if they wanted to (which they don’t!). Eventually nature will force the issue and they’ll either drop dead or have to stop working, but by then their government pensions and medicare will hopefully provide enough support to feed and shelter themselves! As for me, Freedom 55 is the plan. I hope to volunteer and provide financial consulting after that. I’m on track to retire about then giving… Read more »

Waverly
Waverly
5 years ago

You can invest in Real Estate by entering into a REIT fund, or buying shares of a REIT. You don’t have to buy an actual house or condo and rent it out.

Lynn M
Lynn M
5 years ago

Great timing…I retire my 33-year corporate career next week!

Good points to ponder. I have considered all and have planned accordingly for the times ahead.

Linda Vergon
5 years ago

(This comment came from John, a reader of our daily newsletter.) You seem to be very content. I am happy for you. I got to retire a little earlier than I planned to take care of my wife and mother-in-law who were both ill. Taking care of them was a full time job. For me there was no leisure time. This happens to many people but you seemed to assume good health in retirement, if not some reduction in your ability to do things like going out to dinner, joining seniors groups or traveling which were just not possible for… Read more »

William @ Drop Dead Money
William @ Drop Dead Money
5 years ago

John has a good point. There are situational limitations many people are up against as they head into retirement: – health: own, spouse, kids, parents or other family members – special responsibilities: kids, disabilities, handicaps – debt: own or family members’, whether because of bad decisions or unfortunate circumstances – what I call wipeouts: employers going bust, retirement nest eggs evaporating, divorce, opportunities you geared up for disappearing – geography: the place where you wanted to retire becoming unaffordable, family you wanted to join dying or moving, etc. The future is promised to no-one, and not everyone rides into a… Read more »

mysticaltyger
mysticaltyger
5 years ago

The idea that rolling your 401K over into an IRA is always a good idea is misguided. Some 401Ks offer great funds with well below average expenses. Those lower cost funds, while not as cheap as index funds, are sometimes known as cheaper “Institutional” share classes, so they’re sometimes cheaper than the typical fund accessible to you as a retail investor. Bottom line is you really need to check out the performance AND the fees in your 401K. Some 401Ks are absolutely great (usually large companies and government employers) and some are awful (usually small employers).

Fred
Fred
5 years ago

I’m not terrified about retirement, I’m excited about it. My goals at retirement are:
1. Get involved with a couple startups, trading my advice for equity.
2. Do more blogging and article writing
3. Travel (of course)

Prudence Debtfree
Prudence Debtfree
5 years ago

I once heard that when you’re trying to figure out what career to pursue, it’s wise to reflect upon what you used to play as a child. I used to write skits, usually about horrid murders in dungeons, and act them out with my friends in my basement – plenty of ketchup on hand. I also played school a lot. Not surprisingly, I became a teacher, and I have always been happiest when I’ve had meaningful outlets for writing – especially for some form of drama. I look upon retirement in the same way. My vision for retirement includes mentoring… Read more »

Lisa
Lisa
5 years ago

Hi Alea, thanks for the response. The reason I asked about bonds versus bond funds is that Suze Orman made a very interesting point — bonds don’t lose value as long as you hold them to maturity. Bond funds can absolutely tank out on you below what you paid for them. But I tried buying just bonds and found the cost very prohibitive. Anyone else notice that?

William @ Drop Dead Money
William @ Drop Dead Money
5 years ago
Reply to  Lisa

Lisa, you’re right. Buying bonds is not nearly as easy (or cheap) as buying stocks. That’s why it’s pretty much only institutional investors and the very wealthy who buy bonds. And buying bond funds is as risky as stocks, (these probably even more risky) because when interest rates rise, bond prices fall. As for income, keep in mind that even when the stock market tanks, Dividend Aristocrat stocks keep paying dividends, and keep increasing them every year. That’s as risk-free (for income) as you can hope for, and achieves what you want when you’re looking for bonds. You do run… Read more »

imelda
imelda
5 years ago

Hi William, thank you for your answers. That is both disturbing and important to know. What do middle-income retirees usually do to keep their money at low-risk?

Also, I would love to see an article on this site about what is becoming conventional wisdom – investing in index funds. Namely, if everyone in their 20s and 30s today starts investing in S&P index funds, and they all start cashing out roughly 30 years from now, what would happen? Or is that just a massively unlikely scenario?

William
William
5 years ago

Imelda, You raise two points: first, risk. There are low-risk investments, like savings accounts, money market funds and CDs. Unfortunately, the returns on those investments are low. That’s not a coincidence. If you want a higher return, you just have to live with higher risk. Not everyone agrees with me, but I believe if you’re in your thirties, stocks and real estate are your best long term investments. Second, you question about “If they all start cashing out:” Think about that statement for a moment. For retirement to work financially, retirees need an income. That comes from investment income, Social… Read more »

imelda
imelda
5 years ago
Reply to  William

Thanks, Wiliam! On the first question, I forgot about CDs. Clearly I need to brush up on my investment options. 🙂 I agree with you that younger people (like me) should be quite aggressive in investments, given the large amount of time we have to recover. I was thinking about, say, once I turn 50, where to start moving funds into. Or, since I’m currently 100% in stocks, I’ve heard that I should instead have 10-20% in bonds/bond funds. (I’m 29) But since interest rates are so extremely low now, I’ve been reluctant. Very glad to hear your thoughts on… Read more »

Eileen
Eileen
5 years ago

Have funds in state pension plan (various mutual funds) from previous public employment. Not retiring any time soon – can’t afford it. Want to move it all out to an IRA and handle it myself although will move to the same mutual fund investments (I.e. Templeton and Fidelity). Scared but want to get out of public plan altogether. Good or bad move?

Marie
Marie
5 years ago

I have often wondered how anyone could be bored in retirement. There is so much I want to do that I have no time for now. My bookshelves are overflowing, my piano is collecting dust, there are so many museums I want to visit…I could fill a notebook.

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