Those are not the first words you expect to hear when you reach the office, but that was how my day began. Before I get in trouble…I am not referring to the REAL Santa Claus. The REAL Santa Claus is alive and well at the North Pole. I am referring to the person who ‘played Santa’ at my friend Judy’s annual Christmas party. He was 68 years old. Passing earlier than expected often creates questions about retirement preparation.
How many years will I live after retirement?
This is one of the key factors when measuring your probability of retirement success. In most plans, we assume somewhere around 30 years. This is a long time. We don’t know with certainty, which raises questions about retirement.
- Should I spend more now?
- Should I take Social Security as soon as possible?
- How does retirement affect my desired allocation?
Based on actuarial estimates, our planning software assumes a man lives until age 91 and a women age 93. You may have read or heard that life expectancy is lower than the ages listed, but remember that includes all lives, including those who die before reaching retirement. Many say …” I won’t live that long.” Or, “I hope I don’t live that long.” But then again, consider your expectations and viewpoint when you were 30 years’ old; when you 40; and today. I bet they differ.
No ’redos’ for retirement
You can’t ‘redo’ your retirement if you live longer than you originally thought. But, you also can’t redo life if you pass earlier. So, we circle back to a common theme of balance. In this case, we balance the joy gained from enjoying life today with the need to cover expenses in the future.
I assume everyone reading this post knows of someone who passed long before their ‘expected end of plan date.’ When this happens, we might be tempted to stop saving for retirement and spend today because there are no guarantees, which is true. But, there is a guarantee of what life will look like if assets are depleted early in the plan.
If we had the ability to know with certainty when your ‘plan will end’; how much you would spend annually (in precise order); and what the market would return (again, in precise order); planning for retirement would be simple. You would save exactly what was needed. You would only hold the most profitable investments in the right accounts. Your ‘end of plan’ balance would be exactly what you desired without saving too much or falling short. An excel worksheet would provide all the answers…and financial planning would be simple. But, we don’t have that luxury. So, we project, measure and adjust which is important because if we don’t we are less likely to find balance.
Retirement may not be your choice
Many claim they will never retire. They assume they will work right up until they pass (or close). If that were true, the balance would shift towards current spending with little concern about saving for the future. But, what if the choice isn’t theirs? They may be willing to work and might even plan to work until they pass, but someone else may say differently.
Addressing the cost of a ‘short retirement’
The risk of leaving too much or perhaps better said, not living life to its fullest, is a common discussion during plan updates. The two most common adjustments are travel and housing.
There is one plan that stands out as I consider adding travel early in a plan. The clients originally set an annual travel budget for basically the life of their plan. They were 70 at the time. After conversations with friends and colleagues, they began to question their physical ability and emotional desire for ‘big trips’ as they aged. I believe a friend told them ‘you won’t travel at age 75 like you did at age 70.’ No matter how active and healthy you are, this is likely true for all of us.
The result of this realization was a request to ‘test’ additional travel early. “What if we take a big trip every year for the next three and then settle into smaller trips after that?” We tested this scenario and for them, it worked well. In addition, we’ll continue to review and adjust.
The second most common request is based on moving to a new home. Sometimes, this means a second or vacation home and in other cases, it means moving into the home they desire. A couple recently considered this scenario. As they were creating their initial plan, I received an urgent request to review a scenario. Without going into details, they wanted to move to a new home. They had been thinking about it for a while and the builder just offered added incentives. Could they afford the move?
We quickly ran the numbers. We assumed the most conservative (my opinion) scenario; they would use the equity in the current home with the additional balance coming from the portfolio. The probability of success was lower than it was before buying the new house and the projected safety margin was less. But, both were still acceptable. They are moving forward with the purchase.
The strength that got you here…
I often use the phrase… “the strength that got you here may be the weakness that keeps you from enjoying it.” What I mean is many have done such a good job of saving for retirement that they are likely to have more at ‘the end’ than they want to leave. Of course, someone will enjoy the balance, but what if you prefer to enjoy the fruits of your labor?
You would think this would be an easy fix. Just tell them to spend more. Everyone can spend more…right? Wrong! Technically, I suppose they could, but emotionally they struggle. They spent their working years building for the future. They lived within (sometimes well within) their means for 20, 30 maybe 40 years. They were told to save, save, save. Save for what? Don’t get me wrong, having too little savings is a bigger problem, but having more than desired is also a retirement fail. Without a plan in place, most decisions are made emotionally with the primary emotion being fear.
When planning for retirement, the fear of outliving your money and the fear of passing early and missing out on opportunities is a constant back and forth. Therefore, we measure success based on what is known and what we can reasonably assume. We seek a safety margin to account for the surprises not included in the current plan and then we review and adjust. We are often reminded that plans are not static. They are always changing.
I should have known…
It is interesting to look back on life and review what was important at various stages. Stephanie is and has been moving through a transition from theater to horseback riding and volleyball. We began horse riding lessons with a gift of eight one-hour lessons (one a week). Her mother wanted her to be involved in something that was team oriented if she was going to move away from theater. So, volleyball entered the picture. With the benefit of hindsight, I should have known the outcomes.
I agreed to eight horse lessons. Now that it is the beginning of June, I think she has exceeded the eight lessons. And now, the discussion shifts to leasing and then owning a horse. As I consider the costs, I wonder if she would be open to trading in her spurs for a script… not today.
As most of you know, I stay involved in her activities, so it shouldn’t surprise you that after one ten-week season, I am signed up to be a coach next year.
Because she is emptying my bank account, I am exploiting her labor. If you receive a mailing, you might think… it looks like an 11-year old addressed this. You are correct!
Financial planning should not be fear based…but it often is
When I recommended a client add less to her deferred compensation plan and go spend it, she looked at me with confusion. A financial planner is supposed to say keep saving. He isn’t supposed to say spend more. But, she has a significant safety margin and wants for nothing. I asked her to compare a nice trip with her children today versus leaving a larger balance 30 years (hopefully) from now.
When the retired couple begins a meeting with an awkward explanation that they didn’t spend more like we agreed they should, I laugh. I have conversations like this often. People are surprised when I say they should spend more. The reason I do is because saving more and having a larger safety margin is not their desired outcome. They want to be comfortable knowing they have enough, but once that is covered, what should they do with the rest?
The answer is simple…go enjoy life. Life is short and sometimes shorter than we expected. A financial plan should not be based on fear. It shouldn’t constrict you. Instead, it should empower you, but only if the results are favorable. I enjoy telling clients to go spend money when appropriate. I really enjoy hearing the stories they share when they finally take my advice.
If you are looking for balance or want to know how a scenario will impact your projected results, please let me know.