The retirement cake crumbs have been cleared off the conference room table. The cheesy years of service plaque gets tucked away in the guest room closet. You aren't having nightmares about filing that expense report an hour past the deadline anymore. You did it - you are retired! Enjoy the freedom of your new life. You've worked hard to step away from work, but can you retire from your finances? In our final installment of the retirement series, I will focus on challenges to your finances during retirement and strategies for staying retired.
GOOOOOOOOOOOOALLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL! Met his retirement goal!
What Had Happened...
Like your working life, retired life isn't perfectly predictable. You could simply get sloppy with your money and get in a bind. So how can a life's work to save and prepare for retirement vanish?
True story - the mother of a friend of mine worked for a municipal government and had a healthy pension. She was able to retire at 50 (?!?!?) with full retirement and medical benefits. She had the choice of a modest monthly distribution (which would have enabled her to maintain her current lifestyle), or she could cash out and take a substantial (about $500K) lump sum payment upon retirement. She opted for the wad of cash, and promptly chipped away at it. She took a month-long trip to Italy, enjoyed fancy dinners out, and bought a new downtown condo out of her price range. Her reckless spending drained her retirement in a matter of years. By 55, she was nearly broke and had to go back to work as a receptionist to pay the bills. Now over 60, she's still working until her modest Social Security becomes substantial enough for her to retire once again.
Now, this is an extreme example of someone having the ability to retire early, yet waste it away. But the lessons can still apply to anyone. Sticking to your budgeted expenses as best you can is key to a healthy retirement. This doesn't mean you can't change your mind on spending in retirement - you just have to understand how to allocate your money accordingly. Continuing the example above, you can take that trip to Italy or buy the condo IF you've budgeted for it. If you haven't, where do you cut? While you may be able to pull off one splurge, the cumulative effect of reckless spending can catch up. But it doesn't have to be poor money management that forces you out of retirement.
Recovery
As mentioned in previous blogs on retirement, medical issues or other life-changing events can ruin your hard-earned retirement plans. This is why building some cushion into your retirement plans is so important. While planning extravagant trips and starting grandchildren's college savings may be part of the planned spend, set aside some funds for the unexpected. Yes, you know I was going there... have an emergency savings fund is still valuable in retirement! That extra cash on hand will help keep you from dipping into investments early. Another consideration is prioritizing the "fun" spending. Think spending that you can reduce or cut out completely - expensive meals out, vacations, buying a new luxury car, etc. If you run into an unexpected expense, depending on dollar amount, work down the list of prioritized spending to see if you can avoid setting your retirement off-course.
If this is all too intimidating for you, you're not alone. A financial advisor can put you on the right path. If you are comfortable having an advisor manage your retirement savings for an on-going percentage of assets fee (or have one already) continuing to do so in retirement is a good idea. If you are more confident in managing your finances, some advisors offer one-time consultations that will help you develop a plan, where you pay once rather than continuously.
Asset Allocation
Let's take a hypothetical example this time. Say a married couple wants to retire at 60. They still owe money on their mortgage and have car loans, but the favorable stock market has tipped the scales on their 401(k)'s just enough to retire at 56 years old. They put in their notices at work and retire! And they lived happily ever after, right? In my very-manufactured example, no. What I left out is their retirement savings is invested in a pharmaceutical company whose stock price popped on their breakthrough drug test results - a very high-risk investment. While this good news pushed them into retirement, it comes crashing back to ground six months later when the FDA denies their application for distribution. Since I'm just making this all up, let's pretend the stock falls 50% from its peak when they couple retired. Now with only 50% of their savings goal remaining, they have to scale back their spending. Those mortgage and car payments didn't go away, and they didn't really have (or plan to have) any frivolous spending they can cut. Now, they're pulling more than they wanted from that now-reduced savings just to keep the lights on. Only problem here is they counted on the continued returns of their high-risk stocks to replenish their savings. Now churning through their savings to the point they risk losing their home and cars, the couple decides to get back in the job market at 60 and start over again.
So could this all have been avoided? Yes! Let's start with some obvious items. First, having a mortgage going into retirement is a risky proposition - if you didn't properly account for the monthly payments. Try to pay off your home (and definitely your cars!) before calling it a career. Second, this couple is choosing to retire four years earlier than planned. Even though they have the money to do so at the time, did they adjust their retirement spending for those additional years of leisure? But perhaps the biggest flaw - and one major consideration before retiring - is asset allocation.
In this exaggerated example, the couple had all of their money in high-risk, high-return investments. Does that mean you have to sell everything risky and plow all your savings into 2%-yield CD's? Not at all. The key is reducing risk ahead of retirement so you have stability once you're ready to start pulling from your savings. Slowly transitioning some money away from risky investments (e.g. the pharmaceutical stock from the example) to more secure investments (e.g. bonds or an index fund like VOO,) helps dial in your savings without wild fluctuations. And definitely some liquidity is important too - having enough cash on hand to pay expenses for a year or more in an emergency fund may help weather a turbulent market. Some advisors are now recommending a "tent" strategy, where you reduce risk leading up to retirement. But, once you're retired and, frankly, closer to death, you can start ramping up riskier investments knowing you likely won't need the money short-term.
The series is over, and hopefully this was a helpful topic. There are so many things I didn't cover, and topics I could deep-dive into. Like most of my posts, my goal was simply to get you thinking about it. Retirement is truly a time-based topic, and you need to adapt to it as you age. Lastly, I do hope you look forward to retirement. Personally, I think about retirement all the time. Not because I hate work, or wish I was more wrinkly. It's the idea that I can spend my time doing what I want - with family and friends, traveling the world, or simply enjoying a beer on a pontoon boat cruising a peaceful lake. Whatever retirement means to you, I hope you get it and remain committed to helping you prepare for it financially.
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