My Comments: Just 7? No, there are lots more, but you have to start somewhere.
The first element reflects my personal approach to this. There has to be a real understanding of the difference between strategies and tactics. There’s a reason that seems militaristic because it is. I’ve just borrowed it to use in financial planning.
Nick Ventura/Apr 12, 2017
Start with well-defined goals, and revisit them at least annually. The closer you get to retirement, the more often you should sit down and think about your overall retirement strategy. In Ernie Zelinski’s “How to Retire Wild, Happy and Free,” the author makes the argument that setting your retirement goals expands far beyond managing your finances. Retirement planning should encompass all areas of your lifestyle, from where you live and where you travel to how you spend your day and what truly are your income requirements. Cookie cutter percentages and rules of thumb serve merely as benchmarks. Successful retirement planning requires flexibility and the willingness to look at all aspects of your life.
Many people get great satisfaction from work. So, if you are retired, and you like to work, pick something you like to do and gain emotional satisfaction from that activity. This includes working for charitable causes, hobbies, family involvement, etc. These “jobs” may or may not come with financial remuneration. But that’s not the point; many people derive emotional satisfaction and self-worth from working.
Another aspect of retirement is lifetime learning. Staying relevant in today’s technology economy requires a willingness to learn and adapt. Consider this: most medical professionals would agree that 20% to 30% of medical knowledge becomes outdated after just three years. Keeping current on technology and medicine will certainly enhance your retirement success.
Budgeting is more than setting a top-line spending number based on a pre-arranged percentage. Often times, we work from the bottom up, exploring what a client actually spends, instead of what they think they spend. It is not uncommon for individuals to drastically underestimate their spending on non-essential items. How much is your cell phone bill? Cable bill? Groceries? Starbucks?! We encourage clients to look at these as recurring payments. Not $140 a month, but $1,680 a year. Big difference, right? Getting as granular as possible is liberating when planning your retirement income.
While many planners suggest that a client will need two-thirds of their working salary to live comfortably in retirement, our experience shows that they may need anywhere from 50% to 150%. That’s a big range. Only by taking the time to define your goals, and the expenses that accompany them, can we put an accurate “spend” and “income” figure on a retirement portfolio. Even the best crafted budget has to be flexible. Emergencies happen. Grandkids happen. Sadly, health concerns happen. For both positive and negative circumstances, budgets can, and will, expand and contract. Build contingencies into your budget and income plan for a successful retirement.
Let’s consider income. Retirement income can come from many sources. Social security, pensions, retirement accounts, annuities, dividends, even earned income. As financial planners, we often hear stories from clients who “forgot” that they had earned an pension from an employer that they had left decades ago.
Take the time to go through your employment history and discover what benefits you may have forgotten. The impact could be meaningful from a cash-flow perspective. Inheritances can also create retirement income. Again, we often see clients receive an inheritance and immediately spend it. We’d rather go with the gift that keeps on giving – by investing the inheritance along the same lines of a retirement asset and creating a lifetime income stream.
Invest for your whole life. Just as your budget is not going to be static during your retirement years, the idea that your investment portfolio should never change is obsolete as well. We live in a world of massive disruption and change. Years ago, retirees would abide by the rule taking 100%, subtracting their age, giving them the “appropriate” allocation to the equity market (blue chips only!). Today’s world does not permit such simplicity of thought.
This philosophy created an asset allocation for retirees that was heavily dependent upon the fixed income markets. Risk in today’s fixed income markets is considerably less predictable. When creating income in a portfolio, investors should examine many different sources of income. Is it time for fixed or variable rate income sources? Are dividend producing stocks inexpensive or overvalued? Is real estate a proper asset to produce income? Can alternative investments like MLP’s create an income stream? In finding these answers, a successful retirement income stream can become multifaceted and flexible.
Some investors have opted for “all-in-one” strategies, where a glide path mutual fund encompasses their entire retirement portfolio composition. These funds become gradually more conservative the closer an investor gets to retirement. Some funds manage “to” the retirement date, while others manage “through” the retirement date. If you own one of these vehicles, do you know what the fund is designed to accomplish? These funds use historical data to project out into the future the ideal asset allocation. We don’t know what the future holds, and advocate investments that have the ability to be flexible.
Successful retirement comes down flexibility. Flexibility of goals. Flexibility of income streams. Flexibility of spending. Flexibility of retirement investments. Flexibility of the overall plan. As you design your retirement plan, take the time to build in flexibility. It will help build peace of mind, and lead to a more successful retirement.
Nick Ventura is the founder and chief executive of Ventura Wealth Management.