Securing The Golden Years

One of the most challenging tasks for individuals, and financial planners, is to prepare for and maintain financial needs during retirement. Just think of it - most people work for a specified period of time, typically forty (40) years, and then depend upon accumulated assets to provide income for an indefinite period of time afterwards. Mistakes cannot be overcome by next month's paycheck because there is not one. Time for the accumulation phase of life has passed, and the reaping phase has come. Financial decisions have lifelong consequences and should be made with diligence and forethought. Whether one is a few years before retiring or has been retired for twenty (20) years, there are several points that one needs to comprehend before making any decisions affecting a secure retirement. These points should form a basis of understanding for financial decision making.

Point #1 - Never assume. Over the years, I have met many who have assumed that current investing, along with other retirement plans, will suffice. Well, it may or may not. This technique to retirement planning is more along the lines of the shotgun approach - take your best shot and hope that some of your shot hit the mark. That approach may work for some, but its not highly recommended. The only way to secure the golden years is for one (or professional planner) to prepare a roadmap (financial plan) with periodic updating. The initial plan gets one on the right track. Periodic updating brings "environmental" factors (e.g., expensive illnesses, bad investments, recessions, etc.) into focus. This allows for adjustments to compensate and brings the retiree back on track. Missing the mark in retirement planning is very common with the shotgun approach.

Point #2 - Longevity. One can look at parents and grandparents (same sex) to get an idea of potential lifespan, but it will assuredly be more or less. If one considers the statistics (IRS Publication 590), for a married couple, both age 70, at least one spouse will need income for another 20.6 years (its never too late to plan). One must consider potential longevity plus additional buffer years (10 to 20) to secure retirement income. I have heard it said that there are over 36,000 people in the U.S. age 100 and over. The potential for needing retirement income for a long, long time is very real.

Point #3 - Environmental Factors. For this article, environmental factors are situations beyond the retiree's realm of influence. Some of the most common are economic cycles, inflation, interest rates, health, and longevity. Any environmental factor can throw a wrench in the best laid plans. This is why one needs to be cognizant of environmental factors and the consequences thereof. For example, let's take a look at a couple of environmental factors - economy and stock market - to see how a financial decision can be affected. The economy has been in a moderate growth to lackluster stage for the past 2 to 3 years. In the short-term, economists are still optimistic. The stock market is breaking new records, corporate profitability is still strong, but stock values and pricing (P/E and dividend yields) are waning, and unsophisticated investor participation (market indicator) is high. Question - would it be wise to shift all investment funds into growth stocks? Answer - NO! Why - environmental factors indicate a correction on the horizon. Consequence - potential loss on all investments. Please realize that this is a ridiculously extreme example to emphasize the point.

Point #4 - Personal Factors. Lifestyle and risk tolerance are two of the most common personal factors. One's lifestyle, spending habits and debt load dictates financial needs. A pre-retirement lifestyle may not be sustainable during retirement. Don't make a mistake by assuming that it will. Only a well-designed financial plan will indicate the extent of one's post-retirement lifestyle potential. Even if one is currently retired, never assume that a current lifestyle can be maintained. Its not uncommon for retirees to have more than sufficient retirement income during the first 5 or 10 years of retirement, but find themselves in a financial squeeze well into retirement. I am often asked by a retiree, "How can that happen?" Well, to put it simply, the retiree assumed everything was ok plus one or more of those illustrious environmental factors (e.g., inflation) came a callin'. Inflation, for example, not only reduces the buying power of current earnings, it reduces the future buying power of principal as well. Add longevity, taxes and some other likely factors into the mix, and you have a vicious recipe for financial failure.

In summary, only the foolish pursue aimlessly, but the wise proceed with caution and stay informed. These points are definitely not all-inclusive nor a panacea, but they do provide some groundwork for the concerned.

Gary Ellis, MBA, CFP