Retirement – Avoid Outliving Your Money

As someone already in retirement, this is an issue I’m well aware of. It’s not like it keeps me up at night but every time a large bill appears on the horizon, I become increasingly aware of the risk.

For those of you still a long way from retirement, there are many issues over which you have little control. But there are two that I’ll talk about here: inflation and longevity.

There are steps you can and should take before you retire and leave the workforce. The idea is to minimize the financial pain that makes life an unhappy place to be.

With the global pandemic front of mind, longevity is more of an issue for some of us than for others. Those of us who survive the pandemic will return to these two concerns for which there are some partial solutions.

To start, here’s one of the short videos I created to introduce the online course associated with my ebook, The Dynamics of Retirement. Inflation and longevity are but two of the dynamics you’ll have to deal with. (I’ve tried to add this video but am currently having a problem with YouTube.)  https://fast.wistia.net/embed/iframe/9yqu3z8uvx

There are no simple answers available. But that doesn’t mean you can’t take reasonable steps along the way to minimize financial pain in retirement

The first option involves Social Security. The vast majority of working Americans have been paying into the system since they got their first paycheck. Along the way, we get used to the idea of having our paycheck shrink, mindful there’s no guarantee we’ll live long enough to get it back. What it also means is that your current payments are to some extent providing a safety-net income to those born years or decades before you.

Longevity implies you living for many years past your retirement date. Which in turn implies that your children will be paying into the system to support you down the road. Social Security has become a fundamental component of our society when it comes to taking care of our elderly. There’s virtually no motivation to allow our senior citizens to die in the street for lack of money.

Social Security as it’s now configured, is essentially a guaranteed income for life that also has an inflation rider that causes the monthly retirement benefits to increase over time. Any current talk about letting it die and/or not making sure it continues will be political suicide. The last major change happened back in 1983 and it’s due for another. I’m confident necessary changes will happen as society recovers from the pandemic.

There are number of ways to optimize the financial outcomes for yourself, but the primary one is to delay claiming Social Security retirement benefits until  what is known as your Full Retirement Age or FRA. There are tax reasons and longevity reasons for this delay. Keep in mind the changes referenced earlier in 1983 pushed the FRA back as it was obvious then that longevity was increasing.

To the extent you’re aware there are currently loud noises being made about the ups and downs of the stock market, you’ve probably aware there was recently a crash, a partial recovery, and predictions there’s more woe and gloom to come. Comparisons are being made to what happened in the 1930’s when society experience what we call the Great Depression. It may or may not happen again.

But it does suggest there’s a reason to take steps to assure yourself that some of your future income needs will be solved by a guarantee so you’ll be able to pay your bills when your 80th birthday shows up. Some of your discretionary income today needs to ultimately find itself inside what’s known as an annuity. Be aware there are several varieties of annuities, and each of them come in different flavors. Some are worthless and others are great. Don’t get fooled by hype and hard to believe sales pitches. Find someone you can trust to help you.

The idea, is to identify what I call your core expenses: rent, mortgage payments, property taxes, utilities, health insurance premiums, food to eat, and so on. You want to design your lifestyle such that your guaranteed income, from Social Security and annuities, is enough to cover your core expenses.

Once you done that, what’s left is discretionary income. That’s the money you spend to travel, go out to dinner, buy an upscale car, buy expensive gifts for family members, that sort of thing. Those costs can be reduced and while perhaps disappointing, don’t cause you to forfeit where you live or the food and healthcare you need to stay alive.

You cannot be frightened of investing your money, despite the fact that doing so is an existential risk. If you read my book, you’ll hear me say that risk in an of itself is not a bad thing. It becomes a bad thing when you don’t know how to manage it.

Inflation means that every year, everything you buy cost more. Longevity  means living longer than you planned for. Figure it out ahead of time because once you retire, your opportunities to get it right become slim to none.

Tony Kendzior \ MAY 07 2020

One thought on “Retirement – Avoid Outliving Your Money

  1. J

    Thanks for this piece.
    Always important to consider the qualitative nature (why we are looking at the numbers and how to deal with the emotions attached) behind our quantitative nature
    Best regards,
    J

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