It is no coincidence that I focus on retirement with everyone … it is either answering the question “When can I retire?” (pre-retiree) or the question “Will my money last as long as I do?” (post-retiree).
Traditional retirement planning uses one set of assumptions and investment techniques for one group, and then switches those assumptions and techniques for the other group. Traditional retirement planning also applies general rules of thumbs for answers to the above questions.
Life doesn’t work that way … so the plan should not work that way either. What is the common denominator for both groups? Standard of Individual Living (SOIL). This approach to retirement recognizes that you have an individual standard of living that is unique to you, and only you, while working. The aim then is to sustain that unique standard of living throughout retirement. Most conventional assumptions begin with some fraction of your current expenses … this means an automatic pay cut is part of your plan. That’s not what most people want, yet that is what most plans assume. A better plan starts with sustaining your living standards as they are today. This provides flexibility in retirement to have the resources for expenses you haven’t anticipated and allows you to adjust how you spend your money.
Many pre-retirees want the markets to do most of the work. In truth, things don’t work that way. Contributions are required first and foremost in order to have something upon which returns can grow later on.
Many people lack confidence in planning due to other worries and concerns. Planning is a therapeutic way of dispensing with worries, that are usually only imagined, so concerns may be minimized as much as possible. Here’s how that may be done for retirement. Similar planning helps reduce your worries about other financial topics you may worry about as well. In other words, worrying about something never leads to a solution … planning, and carrying out that plan, does.
When doing retirement planning, most people make assumes based on what they perceive to be their monthly expenses. However, there are hidden expenses that need to be considered such as taxes (which never go away) and health care. Social Security is part of your plan. For some Pensions are also part of the plan. (However, returns for pensions, and annuities, are also disappearing … we are all in the same markets globally after all … returns and interest income do not always go up).
The gap needs to be funded by resources you save and prudent management of that wealth once you have saved it. There is more to planning and managing wealth before and after retirement than simply investing. Investing is how you participate in the wealth of the economy. But how do you manage and measure what that wealth is capable of? It is not by returns since you can not control the markets and the economy from which returns come.
An important aspect of planning is to recognize that their are risks that something may go wrong. Research by Employees Benefit Research Institute (EBRI.org) shows that people may expect to retire at a later age, however more than half of pre-retirees are forced to begin retirement sooner.
Many post-retiree not understand how to measure, evaluate, and if necessary adjust, retirement spending during retirement so that resources are sustainable. This has been a focus of many researchers, including myself, who are contributing to the body of knowledge how to measure and monitor retirement resources so you may not outlive them.
I believe my greatest contribution to you, whether you are retired yet or planning to retire, is to assist you as you prepare and plan for retirement.
When you use a wealth perspective, how your worth may sustain your standard of living either while working (human capital) or retired (financial capital), retirement planning is simply a date along the spectrum we call life.