6 Questions if You’re Within Five Years of Retirement at ExxonMobil

If retirement is only a few years away, you should have a good notion of what life will look like for you in this next chapter, at least to start. Will you stay where you live now, or do you plan on moving, downsizing, or building your dream home? How do you feel about keeping your mortgage rather than using some of your savings to pay it off if you don’t move? Will you have enough activities to stay busy and maintain a sense of purpose, or will you seek part-time or full-time alternate employment? Are you ready psychologically to go from “Who’s Who” to “Who’s He?”

These decisions could impact your finances and cause you to question your retirement timetable. And are you and your spouse aligned? My wife told me she married me for better or worse, but not for lunch. If you plan on staying home and your better half wants to spend three months a year traveling, well, friend, there’s a conversation you need to have. Good luck!

Here’s a very rough way to estimate your number. Calculate what you anticipate to be your recurring annual expenses in retirement in today’s dollars. Offset that amount for any continuing income you’ll receive during retirement (such as an ExxonMobil pension and Social Security). Gross up that number by dividing it by (1 minus your expected tax rate). Inflate the result by 2.5% per year (our inflation assumption) until you stop drawing your paycheck. Then, to derive a lump sum value, multiply by 25.

You should be in reasonable shape if you anticipate having that sum available to support you. It builds on a rule of thumb that you can spend an inflation-adjusted 4.0% of a balanced portfolio each year and stand a good chance of not running out of money before you run out of heartbeats. If you plan significant one-time expenses throughout your retirement, add those to the sum.

You’ll note we haven’t differentiated tax-deferred assets like IRAs and 401(k) plans from after-tax assets like investment accounts. Uncle Sam has a claim on all that tax-deferred wealth once you take distribution of it. In other words, only some of that IRA will be available to you. That complexity may lead you to want to use more sophisticated planning techniques (call us if you’d like to learn more). The critical point is you don’t want to stop receiving the paycheck if you lack assets to sustain your lifestyle.

If your savings are insufficient, you might fine-tune your retirement budget, postpone your retirement by a few years, increase your savings in the ExxonMobil Savings Plan or elsewhere, or plan on part-time work in retirement.

Add up your ExxonMobil Savings Plan balance, your anticipated ExxonMobil Pension Plan benefit, any non-tax qualified or incentive plan benefits, your home, and your outside savings. You may be surprised at how much you’ll be worth at retirement.

If you still need to do so, ensure you’ve thought through how you want those assets distributed if you were out of the picture. We suggest you plan in terms of the next five to seven years.

Remember to think about your IRA. That’s where most of your EMSP and any tax-qualified pension lump sum will likely end up. IRAs pass according to beneficiary designations, typically not by will or trust document.

If you and your spouse should both die, are your kids capable of managing what might be left to them? You may be traveling more than in the past—do you have an updated health care proxy and medical directive, just in case? Get all this taken care of ahead of actually retiring. It can be complex, but that’s not a reason to delay putting your affairs in order.

When you go from earning a salary and saving for retirement to living off your wealth, how you’re invested becomes increasingly critical. Retirement requires you to balance the preservation of wealth and growth of assets to sustain you for a thirty- or forty-year retirement. You may have concentrated positions in stocks that have done well for you over the years. But retirement is not typically when you invest to become rich—it’s when you diversify to preserve the wealth accumulated over your career. How have you allocated your holdings to grow yet not face more risk than what you can tolerate?

If the kids are through college, you’ve paid for the house, and your retirement savings are in good shape, you may not need life insurance to compensate for lost wages if you were deceased or incapacitated. On the other hand, life insurance could be of great value if your estate is likely to incur estate taxes or you want to establish a tax-free benefit for your heirs. You may also want to consider long-term care insurance to help pay for nursing home or home health care should you become incapacitated late in life. It’s more affordable the younger you are; you’ll want to qualify while you’re healthy.

A disadvantage of approaching retirement is the reminder it offers of one’s mortality. We all hope for a long and healthy retirement, but leaving the workforce is also a reminder that we won’t be around forever.

We admire those financial decision-makers in the family who care enough about their spouse and heirs NOT to leave them unprepared for what might happen should they not be around. A colleague has written elsewhere about the value of working with a financial advisor.  A trusted advisor who is knowledgeable about your finances and assists you in answering these questions can help keep that smile on your face as you prepare for and enter retirement.