Don’t Get Distracted By Retirement Planning Bling
When my son was younger (say around 10 years old) and had money in his pocket, the toy aisle was the most stressful place in the world. Should he get the LEGO set or the Nerf gun? Or the hundreds of other flashy toys in front of him? The risk of wasting his limited resources on a poor choice was overwhelming. It was easy for him to forget what he had planned on and end up buying something in a flashy package that ended up being junk.
Retirement planning can be this way. When you’re getting ready to retire, you have limited resources, and the retirement “aisle” has so many flashy things attracting your attention that you can forget your core goals.
Will you be impacted my Medicare IRMMA? Is the market in a bubble? Should you do a Roth conversion? What will inflation be? How should you invest? What about long-term care? Should you buy an annuity? On and on the retirement aisle goes.
You can quickly lose perspective and let decision overload steal the joy from an amazing season of your life. It’s easy to get distracted by what I call the “bling” of retirement planning—all the shiny tactical considerations talked about ad nauseam—and miss the essential “big rocks” that are critical but not so shiny.
To help you stay focused on the crucial work of rocking retirement, here are the four big rocks you need to focus on.
Liquidity-The Financial Airbag
Rocking retirement requires the ability to be agile as life unfolds. All your income and spending estimates will be wrong (trust me, they will be). So step one is establishing a financial airbag in the form of cash reserves. Determining the amount is a Goldilocks exercise. Too much is inefficient; too little, and you risk having fewer options when unexpected life events hit. The amount you need in cash depends on how much of your base spending is covered by Social Capital—guaranteed income sources like pensions and Social Security—and how early you are in retirement. Early on, I suggest leaning towards the too much side a bit. Once you’ve found your retirement rhythm, you can dial it in.
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Lifestyle Funding- IOMe
When you retire, you have more debt than you likely ever have.
If you owed someone $150,000 and knew you needed to repay it in two years, what would you do with the money in the meantime? Would you put it in Tesla TSLA or a stock index fund? Probably not. The equity markets are crazy in the short term. Lord knows whether it would be worth $250,000 or $50,000 in two years. No, you’d be very careful with this money.
If you plan on spending $150,000 in year two of retirement, then you have a debt. Since you won’t be earning income, you will need to have the funds available to pay for your life. The same goes for year one, three, four, and five.
To make sure you can pay for all these IOMes that represent the life you want in retirement, you need to first estimate your income and spending for the first five years of retirement. Doing this will reveal the debt you need to fund from your financial assets (money/investments).
Early in retirement, I suggest pre-funding the first five years of retirement IOMes. You can do this with cash, money markets, CDs, or other vehicles that mature when your debt (your consumption) is due.
Longevity-Taking Care of Your Future Self
Getting old ain’t what it used to be. Retirees once had pensions, Social Security, and the likelihood of not outliving their money. Today, if you’re retiring around age sixty, you need to plan for a thirty-plus year retirement.
Securing guaranteed income for your later years could be a wonderful gift you give your old-age self.
Consider the Social Security decision. The standard approach to this permanent decision is to look at the monthly payment you’ll receive at the earliest age you can begin filing (age 62) vs. the larger benefit you receive if you wait. Once you have these numbers, you can calculate the break-even age where delaying pays off.
Instead, I suggest you look at your Social Security benefit as a form of longevity insurance. It provides lifetime guaranteed income (adjusted for inflation) for you and your surviving spouse. If you can delay your benefit until age 70, you’ll maximize the guaranteed monthly income you’ll receive later in life.
Other strategies you can use to manage a long life’s financial strain include multi-year tax planning and investment tools like deferred income annuities.
These are important to consider because your future self will not likely be as sharp as you are now. It’s hard for us to imagine. Try it. Close your eyes and picture yourself at age 85. What do you see? Probably you focused on the physical appearance. Wrinkles and grey hair probably come to mind, but rarely do we consider our mental acumen. We unconsciously assume we will be as mentally sharp as we are today. Being smart about guaranteed income sources can help protect your future self (and your spouse).
Life Shocks-The Guardian Against Unknowns
There are lots of future events that might derail your plans in retirement. Generally, we worry about bad things that could happen, like inflation becoming hyperinflation or everyday medical expenses becoming burdensome due to a long-term illness.
But more likely (and more positively), there will be changes to your planned retirement expenses due to future unknown goals or obligations. You just don’t know what your future self is going to dream up! In my experience, changes to spending goals are the most significant variable in retirement planning. “We thought we wanted [insert spending goals], but now we want [new dream]. Can we do it?” is much more likely than a long-term care event or market shock.
As a result, growth-oriented investments will likely be a permanent part of your portfolio to increase your future options.
Once you’ve addressed the first three big rocks of:
- Liquidity-The Financial Airbag
- Lifestyle Funding- IOMe
- Longevity-Taking Care of Your Future Self
You need to address growing your remaining assets. Luckily, it’s not difficult to stack the odds in your favor if you are well diversified and have an investment timeframe of over 10 years.
Keep the Main Thing the Main Thing
In this case, the main thing is you rocking retirement by creating a life you’re proud to live. Don’t get sidetracked by frequently discussed retirement planning bling. Stay focused on these four relatively unexciting rocks of retirement planning, and you’ll undoubtedly make better retirement planning decisions.
And have a lot less stress.