Most transitions occur without much thought. We move from one task to the next with barely a second thought and little focus. Today looks a lot like yesterday. And then one day, our auto pilot is disrupted, and we need to regain focus.
The change may be something simple, like road construction. What is typically a non-eventful commute is suddenly upended. As you sit in traffic, you remember hearing something about a road closure. After some cursing, you get to your destination (twenty minutes late) and realize your morning commute that was on autopilot needs some attention.
We learn, practice and repeat
Most daily activities which require little thought after learning and practicing. We move and act with limited active consideration. We get to the point where we have repeated a task so many times, we can almost do it in our sleep. Unfortunately, when it comes to the morning commute, it seems many are (or texting, applying makeup, letting their dog drive).
You lock the car with little or no active thought. We commute with limited attention to street signs. We successfully move through life while doing three other things at the same time (especially in today’s world of electronic everything). Your current routine is on autopilot. I am likely not the only one who doesn’t remember locking the door only to realize...of course I did...it is automatic.
As we transition from summer to fall, it might be a good time to consider if you’ve allowed your financial habits to operate on autopilot.
Knowledge and practice create consistency
After extended practice and experience, we barely consider how and perhaps more concerning why we follow the same routine. If you move to a new house, you’ll have to think about the location of the light fixtures. If you take a new job (or experience road construction), autopilot mode is turned off...at least for a little while.
Detours are inevitable during summer road construction
Consider the road construction analogy. The recommended detour is arguably the easiest solution. But the detour route only considers how to navigate a specific (and likely short) portion of your commute. If everyone follows the same route, how will your commute be affected? You may find the detour can’t handle the increased traffic.
The detour may not address important components of your existing routine. You may stop for coffee (or Diet Coke) on your way to work. Does the detour impact your morning routine? You may share a ride with a spouse or drop your child at school or daycare. Will construction impact your plans? You may quickly realize the plan you practiced (and mastered) has changed. It might be time to adjust your plan.
Your financial life is broken into three main phases.
We tend to break your financial plan into three primary phases. You get started…often referred to as the accumulation phase; you retire…often referred to as the distribution or decumulation phase; and you transition between accumulation and distribution. Without ‘financial detours’ you might only need to adjust your plan at the beginning of each phase. But living a life without surprise detours is unlikely. Our goal is to build a plan that provides guidance BEFORE you are stuck in traffic.
Your first step is to ‘get started.’ This is your transition from being ‘sponsored’ by your parents to building your own plan. This phase includes more transitions than either of the next two phases. Ironically, this is also the phase where people spend limited time ‘planning’ and more time reacting. A well thought out plan provides the opportunity to automate with small adjustments when that ‘detour sign’ pops up.
At some point, you ask yourself…’am I ready to retire?’ This phase defines your transition into retirement. Your transition into retirement is usually your shortest phase but gets the most attention. A well-considered plan provides a general map, but you’ll need to pay closer attention as you navigate this portion of your financial life than in the other two phases. Given the number of potential detours, automation can be difficult.
Finally, you enjoy retirement. This is your final transition before the dreaded ‘end of plan.’ A well-considered plan in this phase can often be automated. You will encounter surprises that require detours, but like most road construction, the detour is often temporary with a return to the old normal or maybe adjustment to a new normal.
Potential detours when Getting Started
When getting started, your life is likely changing more frequently than in any other phase. During this phase, you will likely have a job change (likely many). The change in income, benefits, hours, etc. creates a detour that should be reviewed.
You will likely make significant purchases during this phase. A first or next house creates a detour when considering saving capacity. The addition of a mortgage may alter your tax situation. You may need a higher level of protection…both in the form of saving (emergency) and insurance (life and property).
You are more likely to enter a new relationship or exit an existing one during this phase. The addition of a second household income or the loss of one creates opportunities and challenges.
You may add to your family during this phase. The addition creates considerations surrounding life insurance, estate planning, new expenses and maybe the desire to cut back on work hours.
Most would consider the financial detours in this phase to be positive life events but that does not always mean they are good financial events. Having a plan before the event provides alternatives and hopefully an easy adjustment (like bailing on the freeway before coming to a complete stop).
Potential detours when Getting Ready to Retire
When Getting ready to retire, you know you are making changes. This is the most common time for plan review. Simply knowing your commute has changed does not make the transition easy. You understood how to accumulate. You were taught to add. You watched (hopefully) your account balance increase – simple. Now, you need to learn how to spend from that account. This is not always easy.
During this transition, you will find many opportunities and challenges. After years of looking to minimize taxes, you may find yourself in a ‘relatively’ low tax bracket. This is increasingly common if you retire before collecting Social Security. This change in pattern creates a potential opportunity to shift assets from tax-deferred to tax-free.
You might question how you will cover expenses after surrendering your employment income. You might want to spend more in the early years of retirement (usually travel) than you did when working. Without a plan that clearly outlines future income and expenses, you might struggle to enjoy retirement even when your plan projects a high probability of success.
As you transition into retirement, you may realize you are insuring risks that are no longer applicable (loss of income) and question how you will insure new risks (typically health care related). Both are detours easily maneuvered if you have a plan.
Potential detours when Enjoying Retirement
Enjoying retirement is the opposite of getting started. After years of focus on how much needs to be saved, the focus shifts to ‘how much can I spend?’ Your income needs will likely change as you move through retirement. You may travel less (or more) frequently. Your cash flow might increase (along with your tax obligation) as you begin taking required minimum distributions (RMDs). This phase is often the phase with the least amount of change, but you should remain aware of potential detours.
The biggest detour is an increase in spending. In some cases, the increase is a one-time surprise (often a significant repair, replacement or healthcare concern). Sometimes, you might drift into higher than expected spending (remember the idea of not paying attention on the way to work?).
Your plan should address the most common potential detours. Regular updates and discussions are often all that is needed.
Small changes disrupt simple tasks
If nothing changed in your financial life, you might only need to update your plan at the beginning of each phase. You would learn the necessary steps. You would practice the steps (in this case automate) and repeat. Unfortunately, small changes can disrupt simple tasks and big changes require might require a new path. Sometimes the slightest change can derail years of learned and practiced actions.
No lane marker equals chaos
Recently, the city repaved the street outside our office. After the paving was complete, lanes remained unmarked for multiple days. I assume most drivers learned how lanes work. I also assume they’ve practiced driving in a lane. Apparently, most drivers need clear direction.
Too many people have no idea what to do when you remove guidance. They drive down the middle of a two-lane road. They transition from side to side without any signal. With no guidance, a task they should take for granted suddenly becomes “challenging.” It is amazing how a simple change can disrupt a daily and normal behavior.
Small changes to your financial picture can have a similar impact.
No matter your current phase, it is important to look at the overall picture rather than simply follow the recommended detour route. When it comes to financial actions, an adjustment in one area often has an impact in other and sometimes unexpected areas.
Time to transition
For most of the country, today (Labor Day) marks the transition from summer to fall (Arizona has a couple of months of summer remaining). Summer tends to be the season of family and fun. We often put finances on pause.
For us, summer was also a time for family, paddling and friends. Now, we shift back to the focus of finances because before you know it, we will be looking at year end.
Perhaps the most interesting detour to consider this year will be lower tax rates. The continuation of Trump Tax cuts is in question for fiscal and political reasons (my opinion). With that in mind, we will look to take advantage of lower relative tax rates where applicable. This will likely take the form of Roth IRA conversions and potential Roth contributions.
Stephanie navigates multiple transitions
Stephanie (my 12-year-old daughter for new readers) transitioned to a new school this year. The change from a small, private school to a larger, public school has been a smooth transition. She is making lots of friends…including a new “boyfriend.” Of course, she found the ‘crazy boy.’ Crazy tends to find crazy. If she were writing this, she would add…’the apple doesn’t fall far from the tree.” She may have a point.
This week, we also transition to a new volleyball season. We began practices and scrimmages last week for the developmental league. On Wednesday, she begins her preparation for club play.
Sadly, her transition to club likely means my transition away from coaching her. She needs to learn more than I can teach. I suppose I can help her with the practice and repeat portions.
As we transition into fall, we’ll share more insights with you. Many of you ask what Steph is up to. I am frequently asked to add more by Stephanie. She reads her portion with her friends. No doubt she will be sharing this with her new ‘boyfriend.’
Until next time…