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STAN: I'm glad I retired early because I'm much happier now. I'm like, let's go to Florida.
ALLY DONNELLY: Were you ready for a Stan to follow you into retirement?
DONNA: Absolutely not.
[LAUGHING]
No matter how long you've been preparing or how long you've been saving, you still say to yourself, was it enough?
ANDY ALVAREZ: The paycheck going away is arguably one of the scariest things as we head into retirement.
ALLY: Yeah.
ANDY: It's never too late to start planning for that, but the sooner you start, the better.
[MUSIC PLAYING]
ALLY: Dreaming of retiring early? Can you do it? Big questions-- how much money do you need to retire? And how do you make your retirement savings last? Hi. I'm Ally Donnelly, and this is Fidelity's Money Unscripted. With the help of Fidelity VP Andy Alvarez, we are tackling how to build a strong retirement budget, planning for the unexpected, like health care costs and inflation, and how to design and stress test your retirement lifestyle. I also want you to meet Donna and Stan, who share how they retired early and what they're learning along the way.
STAN: All right, Charlie, let's go for a walk. Let's go. Let's go. I retired early at 62.5. And I feel very good about it because I'm enjoying myself.
DONNA: I was 57 when I retired early. And I feel ecstatic about that, no regrets.
STAN: I've always had a philosophy that you should be able to enjoy yourself and be healthy in retirement. I'm actually healthier now than I probably have been in 20 years. You get up. What am I going to do today? I don't know. I can do whatever I want. I can plan my own schedule. I can go to the beach, go golfing, a lot of online chess.
DONNA: When I first stopped working, a couple of my good girlfriends and I were out for a walk, and I said, oh my god, I don't know what I'm going to do to fill my days. And my good friend, Annette, just looked at me, and she said, you're going to live. So, I go and I play mahjong. I attempt to golf. I'm still a terrible golfer. But I will attempt golf. And play my guitar and read. It sounds just so difficult. It's also really nice that our girls, they started a boutique in Boston. I loved it so much, I asked them if I could work in the store one day a week, and they let me. So it's fabulous. I love doing it. I actually, I feel like I'm reclaiming a little bit of myself when I used to work in the city, so I'm in there, and it's a lot of fun.
ALLY: And do they pay you a lot of money?
DONNA: They pay me in clothes. So to me that's priceless, actually. Yes.
ALLY: When did the thought of retiring early crystallize for you?
DONNA: I think it was triggered a long time ago for me with my dad because he passed away fairly young. And when he did, he had just retired. And Stan and I have had this conversation, where we both looked at it, both of our dads, a similar thing had happened, and we both just said to each other, years ago, if we ever have an opportunity, I would love to do that because we want to be able to do things when we're still healthy enough to do it.
STAN: Yeah, I got offered an early package. And it was generous. And I'm like, I didn't even-- I had the discussion.
DONNA: To be fair, what you actually said was, we can talk about it, but I'm doing it. That's actually exactly what you said, Stan, wasn't it? Yeah, and I think that we also realize, too, that when you get back to how do we know, the timing and all of that stuff, our girls were done with college, which, when you're raising kids, that's the biggie. So from that perspective, we were like, now what do we want to do for us?
ALLY: They wanted to be in Florida part time, so they downsized their Massachusetts house to afford living in both states. Donna had owned a marketing firm, and Stan was in finance. They're grateful they started putting money in their 401(k)s early in their careers to have more choices now.
STAN: I knew enough to say, hey, I'm going to start putting money aside to the extent I can afford it. It wasn't a lot of money I was making. It's just the time. But I didn't say, oh, I'm going to retire early. I didn't even think about it. I just said, it was a responsible thing to do.
ALLY: Yeah.
DONNA: And then I didn't really realize how quickly that adds up and how beneficial it is to do that when you're 22 and not start when you're 40.
ALLY: As you thought about retiring early for each of you, what was your biggest concern? What was your biggest question?
DONNA: Oh, god, money. Let's be honest. It's like no matter how long you've been preparing or how long you've been saving, you still say to yourself, was it enough?
ALLY: Now that you're in retirement, what's your biggest question or concern?
DONNA: Money.
ALLY: Still.
DONNA: It's still money.
[MUSIC PLAYING]
ALLY: Yes, that's me too, the money question, I think for a lot of people. Andy, let me bring you into the conversation. Donna and Stan were ready to retire. But retiring early or retiring at all is a lot to weigh. So how do I know if I'm ready to retire?
ANDY: That, Ally, is the question. And there's so many factors that go into answering that question. Certainly, we think about your lifestyle that you want to have in retirement. We think about your financial situation. And there are guidelines that exist that we can certainly talk through, but it's going to be unique for everybody.
ALLY: So let's get into some of those factors to weigh as we consider retiring or retiring early. There were some surprises for Stan and Donna that they had to work through.
ANDY: Yeah, and I think as you transition into those retirement years, your lifestyle does change. We saw with Stan that he went from a really regimented lifestyle, from working out in the morning, to going to the office, to having all this free time. Questions you might want to ask yourself are, what do I want my lifestyle to look like as I head into retirement? Do I really go to stop working altogether? Do I want parttime work? Is there volunteerism that I want to do? You also want to think about your family members that depend on you each and every day or that could depend on you, and how do you want to interact with them, and what your legacy might look like throughout retirement and beyond.
ALLY: So let's dig deeper into the financial questions. What are some things I should be considering?
ANDY: As you reflect on that lifestyle question, big question that always comes to mind is, well, how much does that lifestyle really cost? So really understanding, what's it going to cost me to live the life I want to live in retirement? And then also understanding what resources do I have? So what do I have in terms of retirement savings or other savings account that I can use towards that lifestyle that I want to enjoy throughout retirement?
ALLY: What do you see there in terms of as people are thinking about their budgets--
ANDY: Today versus--
ALLY: --while they're working? Yeah, exactly.
ANDY: Yeah, exactly. What we often find is that we are spending more than we really think that we are. And so in your working years, we don't all-- some people do and are great at it. But we don't all really sit down and think about a budget. We know how much we have coming in. We ensure that we're not spending beyond our means. And we go on living our lives, knowing that we have that steady income. As we transition into retirement, and that income goes away, and we're much more dependent on our assets, understanding how much we spend and where that money goes is crucial. And it's thinking about, geez, how many different streaming services are we paying for? And I guess we do pay for the garbage to get taken out every month. And then also when you think about your lifestyle, your lifestyle will likely change in retirement. So while you were working, maybe you had time to play one round of golf. Maybe now you have time to play five. Maybe you always wanted to do that gym membership, but the time really, the commitment wasn't there, and now you're ready to go, and you're taking additional classes. So there's so many factors as you enter into retirement that could really impact what that budget or what that cost to live that life could be. And so taking stock and really taking the time to go through that process is crucially important.
ALLY: How about savings? How should we start thinking about savings?
ANDY: Yeah, so that's really the second component that's as important right. So once we understand, we've done the work, the very what I'll call sometimes boring work of figuring out the budget, now do we have the resources to support it? And so, again, it's taking stock of how have we saved throughout our retirement years? And first thing we often think about is our retirement savings, things like our 40k(k)s, or 403(b)s, or IRAs, or HSAs, and I'm sorry for all the word soup, but ultimately, the different accounts that are really earmarked for retirement savings. In some cases, we may even think about pensions that maybe our company has. Beyond our retirement savings, we might also think about what are some of those other maybe savings accounts that we've had over the years, maybe in a bank or in an investment house, where we've saved and invested in different stocks and bonds throughout that period?
ALLY: Like a brokerage account.
ANDY: Like a brokerage account, et cetera. The final thing I'll say to that is, are all those dollars truly earmarked for retirement? Maybe there's a wedding that you're planning to pay for. Maybe there's college expenses. Maybe your retirement dream is to move somewhere, to have a vacation house. So it's really about understanding, what are all those factors? And what are the resources that we have to support them?
ALLY: I hear you on that. But I also think about how reliant I am, psychically, on that steady paycheck. And that's what makes me nervous.
ANDY: The paycheck going away is arguably one of the scariest things as we head into retirement. To your point, as you're working, you know that's coming to you. And when that goes away, all of a sudden, your whole lifestyle is dependent on your investment accounts. Now, that's not entirely true. So there are things like Social Security that we'll want to think about and the impact that can have. As I mentioned, some companies have pensions, where they do provide income. You can also use some of the investments that you've saved to really invest in your own pension through income annuities. Ultimately, you can think about the different ways to get income, either through these types of investment vehicles or drawing money down, but it is a big shift of going from that paycheck that you're relying upon to creating that paycheck yourself.
ALLY: Yeah, creating that paycheck, creating that financial plan. It was one of the things I wanted to talk to Donna and Stan about. So let's hear what they had to say. What was it that gave you the confidence to take the leap?
STAN: I'd say a couple things. I'm fortunate in the fact that I get some pensions that I've already earned. So I knew I have a steady income. We're not going to go broke. That'd be number one, and just number two, the amount of money that we've set aside, if handled properly-- we all know that we can't control the market or whatever it's invested in, but if you have time on your side and you have other sources of income, that gave me quite a bit of comfort.
ALLY: So it's setting up that retirement.
DONNA: It's setting it up. And then even and even for me, and this might be a strange response, but because of the fact that I stopped working as early and as young as I did, if there was ever something that came up two years from now or three years from now, I can always go back. I can always pick up a side gig somewhere or do some consulting, get another job, if I needed to. So it was taking a leap, but it was taking a leap and knowing that there's a cord you can pull with a parachute if you absolutely needed it.
ALLY: I love how they're thinking about that, that parachute. But Donna and Stan are one story among millions of stories. So let's pull back a little bit. How much money do I need to retire?
ANDY: The reality is, it's really a personal equation for every individual, every couple that's out there. And if you haven't thought about those things that we've just discussed when it comes to lifestyle and your savings and your income, it's hard to answer that. What I would say, though, is building out a plan is crucial to seeing if you're on track. And that might happen the day of retirement. It could happen 15 years prior. Certainly, the more time you give yourself, the better. But you can start right now. So ultimately, Fidelity does have some guidelines to help you think through, are you prepared, and have you saved enough?
ALLY: What are they?
ANDY: We believe that you should have six times your salary by age 50, 10 times by 67. If you're planning to retire early, say, before 62, Fidelity suggests aiming to save about 33 times your annual expenses. And that's considering a conservative withdrawal rate of around 3%, meaning how much you're taking out every year. So if I can put that in an example for you, we say someone's 45 with annual expenses of $75,000 a year. To retire at 62, they would aim to save 33 times that $75,000, or around $2.475 million. With a 3% withdrawal rate, they'd be able to take out $74,250 in that first year of retirement. So as we talk about expenses and we talk about that income, one thing I really want to talk to you about is health care in retirement and what it's going to cost. And I think Stan's feelings on this echo what a lot of us feel. So let's have a listen.
STAN: So I'm on the eve of turning 65. And you kind know, I'm like, how much is health care going to be? And then, of course, in the definitive world we live in of taxes and everything, of course, if you're-- we're fortunate. I'm lucky. We're making more money in your final two years before health care. Well, you're going to pay more money for health care. It's like a catch-22. And I said, well, how much more money am I going to pay? And so there's these unknowns. So I literally have an idea of how much I'm going to start paying for health care. But the cost of that is unknown. It keeps rising. It's scary. There's an age difference. I'm going to go on Medicare. She's not.
DONNA: Much younger. Can we get that on the record? Much younger.
STAN: So to me, it's the expense side that you can control. But some of it you cannot control. ALLY: If I don't know exactly what my health care needs are going to be, how can I properly plan for those costs?
ANDY: Yeah, and Ally, the reality is most people don't know what their health care costs are going to be. Even in our working years, we don't know what our health care costs are going to be. But many of us, thankfully, have the access to insurance that can help cover those unknowns. And in your retirement years, it's really no difference. The main factor is where you get that insurance and what the cost of that insurance is. So Medicare is available to once you hit age 65. If you're retiring prior to that, you really need to think through, well, how do I bridge the gap from when I retire to when I'm eligible to that Medicare insurance? And we can think about things like COBRA through work. We can think about private insurance. But ultimately, there's going to be costs associated with all of those. Once you're eligible for Medicare, you also have to think about, well, what is the cost of Medicare? And there's parts A, B, C, and D. What do they really mean? What's supplemental? There's a lot of information that you need to take time to figure out. And there's a lot of great resources out there, both on fidelity.com, but certainly on the Social Security website as well that can help you take the time to learn and understand those.
ALLY: Yes, absolutely. But I still do want some hard numbers to start thinking about or for folks to think about. And Fidelity has done some work here. So Fidelity's retiree health care cost estimate-- walk me through the latest numbers.
ANDY: Yeah, so when we think about the latest numbers, we believe that a 65-year-old retiring this year can expect to spend about $172,500 on health care and medical expenses. And that cost includes Medicare. It does not include the cost of long-term care. The average couple could spend about $12,800 on health care care just in their first year of retirement. ALLY: Yeah, just in their first year. That is just such a huge-- ANDY: It's a huge number.
ALLY: Yeah, and factor to weigh into your planning. I know you and I have talked about this before. But I just love this premise of stress testing your retirement. So what are some ways to think about stress testing?
ANDY: It's funny. When we think about stress testing our retirement, our minds probably initially go to financially, can we do it? I'd argue it's just as important to stress test the lifestyle that you want to live in retirement. Do you want to move somewhere? A lot of retirees think about moving to another state or a warmer climate. Have they actually spent time in those places? Or are they just looking at the pictures in the magazine? Again, do they want to work part time? Is there volunteer work? It's really important to think through, hey, if I want to do these things in retirement, let me test them out now so I have a good sense if it really is where I want to spend my time. And you'd much rather find that out now versus well into retirement years.
ALLY: I think Donna and Stan really found that it was important for them to talk about it as a couple. Donna retired nine months before Stan, and she had already built a community, going to the mahjong and doing those things. And Stan had to figure himself out, and then really, those habits that they were going to have as a couple. Let's check it out.
STAN: I woke up, and I was like, what am I going to do today? I haven't really thought about it. And then all of a sudden, it dawns on you like, oh my gosh, this is it. You got to do something every day. And I'm not going to just stay in my pajamas all day and do something. I got to get some structure to my life.
ALLY: Were you ready for a Stan to follow you into retirement?
DONNA: Absolutely not.
[LAUGHING]
ALLY: Why?
DONNA: Absolutely not. Well, because for the longest time, I had that autonomy and that independence to do things that I liked, that I didn't have to hear somebody eating their lunch next to me. I love you, Stan. But when you're used to-- when you're used to having your space, it's very different because he used to get up and get on the train early in the morning. So it was me and the dog, and we had our little routine going on.
ALLY: And then Stan comes in and chews loudly.
DONNA: And he came in and he changed it. So it took a bit. Honestly, it did.
STAN: The dog got a lot of attention back then.
DONNA: He did.
STAN: Yeah, and I think we went through a lot of changes. And now we're ready to land, I think, in the real retirement, if you will.
ALLY: Interesting.
DONNA: And so we're going back to Florida in a couple of weeks. She makes fun of me because I actually like to get seasonal jobs down there.
ALLY: Talk to me. Ice cream man or where are we?
DONNA: Pickleball.
STAN: So last year, I took a course down there to learn how to play pickleball. And they said, oh, we're looking for people to work the pickleball courts. So last October, I had a job. And Donna is like, well, how much does it pay? I'm like, it doesn't matter how much it pays.
DONNA: He had no idea.
STAN: It's something to do. And I love being outside. I call it beer money or going out to dinner money. It does that. But also, on the other thing, there's a high level of interaction with people.
ALLY: Community.
STAN: I have a place to go. I have a responsibility. There's more structure in my life than there was. And it's fun. And I'm outside.
DONNA: I was just laughing because I got this mental image in my head. It was his first day that he was going to the pickleball courts, and he had his T-shirt on and his lanyard. And he had his lunch bag. I took a picture and sent it to the girls. I hope Dad makes friends. He's going for his new job. And I joke, but it was-- I actually could see a difference in him in wanting to get out, get out the door, had a reason for getting up and meeting people. And I think that the community aspect of it is huge.
ALLY: Poor Stan. Let's move from the lifestyle stress test to the financial stress test. What do we need to think about there?
ANDY: Absolutely. So when we think about the financial stress test, we really want to think about all the factors that could impact us, taxes, the cost of living, even the inflation is our cost of living goes up. We talked earlier about some of those milestones of the six times and then 10 times. Have you saved enough? Are you there? And then ultimately, we want to think about market volatility. What are some of those factors we can't control that could directly impact our retirement years?
ALLY: Yeah, and for Donna and Stan, who are a couple years into their retirement, still their number one question, or their primary focus, is about the money. If I'm understanding you, your concerns about retiring early were largely will we have enough?
DONNA: Yep.
ALLY: And your concerns now living in retirement are will we have enough?
DONNA: Will we have enough? Yeah.
ALLY: So how do you figure out what enough is?
DONNA: Ooh, that's a good question.
STAN: I don't think I don't think you're ever going to know the answer to that in one sense. There is guidance. There's the tools of fidelity, which we use extensively. It's like, well, these are just projections. I think it's an acknowledgment about being realistic about what you can afford and not afford, where when you're working full-time, you're like, I can do that. It's a good year. I'm going to get a bonus. That's gone. Those days are gone. So you have to be brutally honest with yourself. And you can't say yes to everything because we've said yes to everything our entire lives. Well, you can't do that anymore. ALLY: Knowing that have to be brutally honest, knowing that you only have so much regardless, what tweaks or changes did you make to your lifestyle or life to make sure you'd have enough?
DONNA: The biggest tweak or the biggest change that we made was we sat down and said, our primary residence is here in Massachusetts. And our biggest asset is the home that we have here. And do we want to stay in that home, in that asset? Or do we want to do something different with those funds. So we made that major decision to say, let's sell that house because that's going to free us up in a very big way and allow us to then say, now where do we want to be? Is this where we want to stay full time? And it enabled us to say, no, we want to spend half of our year in Florida. And what does that look like? And we could control what we spent on that home down there. And that freed up some additional revenue for us to be able to do some more things. So that was a major tweak.
ALLY: Did you factor the cost of living in Florida into the plan?
STAN: Well, Florida doesn't have a personal income tax. And Massachusetts does. So the difference in that is a 5%, 6% savings. And then there's also there's just little things like the excise tax for vehicles. There's no such thing down there. But it's meaningful.
ALLY: As you think about that nest egg and all the factors that could affect it, what's the secret sauce? How can I make my retirement savings last?
ANDY: Stan and Donna really said it best. It's about understanding what can you spend? What can you afford? And being realistic about that. And there are factors that we can't control, things like market volatility, how long we're going to live, our longevity, and certainly inflation. And so in retirement, when you're thinking about that 4% to 5% withdrawal rate or your investments, you also have to factor in how that money is invested. It still has to be invested for growth and in the market so that you can fight that inflation. You may also want some more guaranteed income sources so that you have a standard of living you never fall below, that consistent paycheck that you're used to. And so these are really important conversations that you do sit down and have with each other to understand what you both feel is most important.
ALLY: What are the biggest risks to my retirement savings?
ANDY: Yeah, Ally, there's the risks that you can control. Am I spending too much? Am I taking out too much in any given year? And then there's some of those risks we can't control. Market volatility-- is the market going to drop by 20% in a given year? Inflation-- we've seen the impact in the more recent years that inflation can have, and again, certainly longevity or long term care costs. These are all things that could factor in that could really impact our retirement that aren't necessarily always in our control. ALLY: Yeah, and I think of Stan and Donna, too, when you're taking Social Security, if you might take it too early.
ANDY: Yeah, so Social Security, ultimately, you can take as early as 62 up to the age of 70. And if you take it too early, you could potentially reduce your monthly benefit by as much as 30%. Every year you wait, you potentially get another 8% increase in the annual amount that you receive. So sitting down and understanding what is your benefit and what are the different factors when taking it is really important.
ALLY: We've talked a lot about having enough money for ourselves. But for a lot of us, leaving a legacy to our kids or to other loved ones is really important. I asked Stan and Donna about this. How do you think about what you wanted, or do you want to leave the girls? Or how do you think about your financial life as you think about your legacy?
DONNA: To be honest, Ally, I kind of feel like we've given the girls their legacy already. And certainly, we hope that we live a life that we are able to leave something behind for them. But it's not in the same sense that I think that our parents may have had growing up, that where they didn't spend money, and they kept things to themselves, and didn't live their lives the way that they wanted to because they wanted to save, save, save, save, save. For what? I don't think either one of them would expect that if something were to happen to Stan and I that, all of a sudden, they're going to get this huge windfall, that that's the expectation from them that they would get that. And we've talked a little bit already about how we started our careers and understood the importance of saving and doing things. And I think we've done a pretty good job of instilling that in both of the girls as well.
ALLY: That financial education.
DONNA: That financial, yeah, and that financial independence and taking control of that at an early age so that hopefully they're building their own legacy, Ally.
ALLY: Did you hear that, building financial education? I knew you'd like it.
ANDY: I like that a lot.
ALLY: But as we think about leaving a legacy, whatever that may look like, how do we do that without bankrupting our own retirement?
ANDY: It's a personal question. And I applaud Stan and Donna for knowing what they wanted. They felt they provided that financial education, which, of course, as a financial advisor, I love that they did that for their children. But understanding what you want in retirement, that lifestyle and legacy, it is a balancing act because they both impact each other. What do you want that legacy to look like? For some retirees, they want to be able to give in their retirement years to maybe support those they care about or the institutions they care about while they're living and throughout their retirement years. Others like the idea of being able to leave a legacy once they're gone. But ultimately, it is about taking care of your lifestyle first. And it's the analogy to the oxygen mask. You got to put it on yourself first before helping others.
ALLY: Yeah, yeah. It's so true. Andy, this has been such a great conversation. And before I ask you about your final takeaways, I did ask Donna and Stan for their biggest lessons for others.
STAN: I would put a lot more money in Roth. Every move you make now, you have to think about the tax consequences, but really try to specifically find out your exact situation on taxes and health care. And it sounds simplistic, but it's harder than one would think. Recognize that whatever projections you have for expenses are just a projection. And it's hard. It's hard. And of course, there's surprises. Somebody becomes unhealthy or, or, or, or. It's not perfect. It's not perfect to project your expenses, especially now, because there's a lot of inflation, like holy mackerel.
DONNA: The biggest piece of advice I'd give to somebody who is thinking about retiring early is to recognize it's going to take time after you make that decision. And if you had your whole identity tied up with your job or with your career, to all of a sudden not have that, that's hard. Give yourself the grace of a year. Recognize for yourself that it's going to take you a solid year to really feel like, did I make the right decision? Am I doing the right thing? Is this what I want for myself. Financial research is really important. Health insurance is really important but also recognizing who do I want to be in this new phase of my life?
ALLY: You said, give yourself a year. Did I make the right decision? Did you?
DONNA: I absolutely made the right decision. And we're having fun. Stan and I, I think, are getting into a groove together that we're really enjoying our life together. ALLY: Which is terrific. So leave folks with some final takeaways.
ANDY: Absolutely. So really, in retirement, look, there's things you can control, how much you spend, understand your budget, and the resources you have, how much you've saved and how much you can save leading up to retirement. So all the things you can't control, like that market volatility and inflation, it's all about having a plan. And like I said earlier, whether you're retiring today and starting that plan, or you're 15 years out, it's a journey. It's personal to you. But it should be something you enjoy and something you're excited about moving into.
ALLY: Excellent. Wise words. Andy Alvarez, thank you so much.
ANDY: Thank you so much, Ally.
ALLY: If you want to explore retiring or retiring early, we have lots of resources on our website, including Fidelity's retirement score. It lets you see where you might stand for retirement right now. There's also a retirement income calculator, which lets you plug in some numbers and take a look at your potential monthly income. Find a link in our show notes or at fidelity.com/moneyunscripted. Be sure to like, follow, subscribe to the podcast, and we'll see you next time on Money Unscripted. It's your life. Get your money's worth.
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