We don’t usually associate retirement with spending money but there’s a very strong relationship between the two.
While there are other reasons, the primary reason for retirement is not wanting to work any more. Which begs the question, how are you going to pay for it.
In today’s America, apart from the current pandemic with it’s human and economic turmoil, life is almost always better with more money. Which in turn brings us to another big question. If you do retire, how much money will be enough?
Frankly, that’s a question with no real answer. You have no idea how long you’ll live, what will happen to the money you’ve hopefully saved and invested to pay for it, or whether unanticipated health care costs lead you to bankruptcy. Not to mention Social Security staying healthy and able to pay benefits, tax rules that may or may not change, and other things that go bump in the night.
The number of non-static variables will drive you nuts. Unfortunately, sitting back and hoping for the best is usually a recipe for disaster. Which means trying to figure it out ahead of time, assuming you’re willing to spend the effort and have enough discipline to try and get it right.
So what are some of these variable?
The first is your life expectancy. How’s your health now? Are you family members long lived or not? Regardless, the trend toward increasing longevity has been around for a long time.
30 years ago I used to counsel clients to plan around average life expectancy, which was a mistake. Now, you need to plan in terms of living to age 100. It may not happen, but that needs to be your base assumption.
Keep in mind that if you plan to retire in your 60’s, you’re looking at a 25 to 35 year span during which you’re going to have bills to pay. It’s unlikely that someone is going to magically show up at your front door with a bucket of money so you can pay all your bills going forward. It’s on you to make it work.
Another variable is the expected inflation rate. I’ve put together a short video called Your Life In 7 Words that deals with this issue and how you need to start thinking about inflation. Right now it’s pretty low, but it ain’t going to stay that way for 25 years.
How about expected portfolio returns for the next 25 years? The only thing we have to work with is past history which if recent experience is any guide, will scare the bejeezus out of you. Life never moves in a straight line and when it comes to investment performance most of us have no clue what will happen next.
I wrote a blog post that describes one variable that’s largely a function of when you were born. How much responsibility do you have for that number? Anyway, it deals with an issue called the Sequence of Returns Risk that may come into play for you.
Another variable is the rate at which you withdraw funds from your hopefully accumulated funds so you can pay your bills on time. For years, we financial planners suggested that 4% per year was a safe bet. But that assumption is now out the window for two reasons at least. One you already picked up on if you watched the 7 Words video referenced above. The other is that for demographic reasons, the average portfolio performance going forward for the next decade is most likely not going to be nearly as good as the last decade. Withdraw money at 4% and you may find yourself broke and declaring bankruptcy.
In my recent effort to stay busy and maintain some degree of sanity, I’ve written and published an ebook titled The Dynamics of Retirement. If you’ve still got years to go before you retire, or if you’re already retired, do yourself a favor and at least check it out. It’s not expensive and you may find something that truly resonates with you. Just remember, life can sometimes be no more than an elaborate crap shoot unless you develop the skills necessary to bend the curve in your favor.
Tony Kendzior \ MAY 04 2020