The most dangerous part of climbing a mountain is not getting to the top—it is getting back down safely. In your financial life, the climb is your working years where you save and invest diligently to create your nest egg. During the descent, you use that nest egg to create lifetime income to live richly and leave behind the right amount.
There are five key retirement factors that you can control and four that you can’t. My industry loves to focus on what we can’t control such as investment returns rather than how to strike the right balance to live your richest life and be intentional about your legacy.
Factors Within Your Control
Spending—how much income do you want in retirement? A common rule of thumb is to plan for 80 percent of your pre-retirement income, which does not acknowledge the fact that many dream of retirement travel and other activities that will actually increase spending. Our baseline recommendation is to plan on
continuing your current lifestyle into retirement and account for new expenses such as healthcare.
Savings—how much are you putting aside for retirement right now? Can you save more and if so, how much more? We run scenarios to show how increasing your savings now will increase your income in retirement.
Timing—when do you plan on retiring? Will you quit working completely or work part time? Will you have any major purchases that will affect that goal such as weddings, relocation, funding college education for grandchildren, etc.?
Risk—what asset classes are you invested in? Are you invested in the appropriate asset classes for your goals and risk tolerance and are you properly diversified? Asset classes with the highest expected returns are also the ones with the highest volatility, which can make them very difficult to own.
Legacy—what do you want to leave behind, who do you want to leave it to and when? It is common to underspend in retirement and sacrifice retirement standard of living and then burden heirs with unearned wealth that can actually cause harm. Many retirees have a default plan to die rich because they don’t have a strategy for maximizing the amount of income they can safely generate in retirement.
Factors Out of Your Control
Market Returns and Sequence of Returns—even the best investment portfolios are highly correlated to the returns of the broader markets, which are completely out of your control. The S&P 500 index has averaged over 10 percent per year since 1928, but those returns have come with a lot of variability from year-to-year. In 2008, for example, the S&P 500 lost 36.6 percent and in 2013, it gained 32.2 percent. A major challenge for retirees is poor market returns in the first years of their retirement, which can have a very negative impact on their portfolios.
Inflation—as measured by the Consumer Price Index, inflation has averaged about 3 percent per year over the past 100 years, which means prices double every 24 years. This has varied widely in the past, averaging 7.8 percent per year in the 1970s (an item that cost $1.00 in 1970 cost $2.12 in 1980) and only 1.4 percent over the past 10 years (that same $1.00 item in 2008 only rose to $1.15 by 2018). High inflation can have a profoundly negative effect on your purchasing power in retirement, particularly if you are on a fixed income. Check out usinflationcalculator.com.
Your Lifespan—it is true that you can adopt a healthy lifestyle to give yourself the best chance for a long life, but genetic and some environmental factors are outside of your control.
Unexpected Events—such as an accident, health crisis or financial reversal. While you cannot predict these events, you can create a plan that can best accommodate the unexpected.
Before smartphones and GPS, people used to use AAA to plan for and navigate long road trips. AAA would create a custom printout called a TripTik with detailed directions and times to get you from your starting point to your destination. The financial planning industry uses a similar approach, projecting a single path from your current financial situation to the end, often in the form of a daunting printout. Both approaches have the same problem—unexpected things happen and average returns happen very infrequently. Static financial plans become out-of-date the first time you get detoured or delayed.
Our modern financial planning is more like using Waze or Google Maps. It is online and remains updated to be able to adjust to the factors that are shifting both within and out of your control. You only get one chance to live your life, but we now have the tools to simulate 1000 financial lifetimes for you based on the factors you can and can’t control. We also simulate what it would look like for you to retire at an unlucky time with two bad stock market years in a row right when you retire.
To Learn More
We provide a compassionate and confidential approach to help clients get their financial houses in order. We can work on an ongoing basis or provide specific quotes for any of your one-time planning or investment needs and we always offer an introductory meeting at no charge to allow you to ask us anything that is on your mind and get to know us better.