Growing older requires most of us to think about the road ahead and things we have never approached before. A big one is the “R” word. Yes, retirement starts to get closer. If you have taken the time to prepare, then it’s probably an exciting time. But if you didn’t prepare, the thought of retirement can fill you with a sense of dread. So, here are a few challenges to consider as you approach retirement.
1. How long am I going to live?
It sounds weird to ask that question. But since you really don’t know for sure, I think you should plan for a long period of time. The worst thing I can think of is running out of money 15 – 20 years into a 25 or 30 year retirement. I for one do not want to be old and broke. The way most financial planners address this is longevity.
In the past we typically planned to about age 82. Innovation has led to longer lives and developments in health care continue to improve our lives. Now we see most financial planners moving toward ages 90 to 105 as the new lifespan. So, as you work through your retirement numbers, it may be smart to use a life expectancy of 90 or beyond. Planning for a longer life could help ensure you won’t run out of money. So, now that you have a timeline to work, with what’s next?
2. Get ready for your retirement future.
It is human nature to put things off, and if you procrastinate on building your retirement plan, you may end up disappointed. It's been said that hope is not a plan. Getting all of your “stuff” together and going to see the retirement doctor is the prescription for what ails you.
Begin by creating an inventory of:
- what you have
- what you owe
- how much you’re saving
- guaranteed sources of income you will have during retirement
- how much income you want once you stop earning a paycheck
Knowledge is power, and if you understand your personal situation and work the numbers, you can develop a retirement plan to provide what you need (and perhaps most or all of what you “want”) in retirement. So, get your information together; measure, evaluate, and come up with a plan.
Investment planning requires a change of direction as you near and enter into retirement. The once useful volatility of financial markets becomes a foe which can rob you if you don't have a strategy to manage risk. When you were systematically saving for retirement, you could buy low and average your investment costs over the accumulation years. Because you are no longer in the accumulation phase, downside fluctuations can cost you a substantial amount of money, especially if you are drawing off of a pool of savings that is down currently.
3. Sequence of returns.
Basically your returns need to be mostly positive, and if possible avoid risk of loss while maintaining a return which exceeds your withdrawals and inflation. Volatility is not a real friend unless it is always upwards volatility. Also, inflation can rob you of your future lifestyle without a method to accommodate that possibility. So, yes, do your homework and measure twice before cutting (to quote what the folks that work on my house say to me when they are building or repairing something.)
If you aren’t careful, you will find yourself reacting to the news and short term market volatility too much. So your plan and strategy are crucial in building out your retirement cash machine. Know what you own, know how the various investment components react in good times (and more importantly in bad times), and also know how you’re going to get paid. This knowledge will go along way in alleviating stress about. “My emotions got the best of me” should not be in your vocabulary. To have confidence you need to build your strategy to last:
- How much money must you have to survive?
- What amount do you want above that?
- Have you considered health care costs?
- Do you know how you get paid every month?
- How will your assets pass to your spouse or heirs?
The take away from this should be that if you start planning now and create your path, then you can stay on that path and continue moving forward throughout your life. Small adjustments are much easier to make than major course corrections, so the sooner the better friends.