I did a quick Google search of the top personal finance questions recently and this topic dominated most lists: How much do you really need to retire?
One reason this question may rank high is there are no quick and easy answers. Another reason is that the retirement planning assumptions used for the past half-century or so are no longer valid.
What Will Retirement Look Like?
All of us have a unique picture in our minds about what retirement is...and what it isn’t. These images are created organically from our personal family histories and experiences.
However, a lot has changed in the past couple generations in terms of longevity and retirement expectations. The result is that only about 18% of Americans feel very confident that they are well positioned for retirement. (Reference: EBRI 2017 Retirement Confidence Survey)
Determining the financial resources you need to retire isn’t just a math equation because your longevity is unknown. A 65-year-old couple in reasonable health can expect that one will still be alive at age 90.
Of course, some individuals will live longer and others not as long. As the chart below details, longevity is one of the factors where you have some control. Lifestyle, diet, mindset, and DNA all play a role.
It Comes Down to Two Alternatives
Ultimately, there are only two outcomes. The first outcome is that you will have enough money to maintain your existing lifestyle for your entire life. The alternative outcome is that you won’t have enough and your lifestyle can’t be sustained. In other words, lack of funds will force you to reduce your lifestyle along the way.
We have had hundreds of interactions with clients nearing retirement. One commonality is that most of these individuals dramatically underestimate what their actual living expenses will be after full retirement.
How much you may need will depend on many variables. But our empirical data tells us that many retirees will actually increase spending for a few years post-retirement assuming good health.
Becoming Comfortable with Being Uncomfortable
Perhaps the most overlooked variable within your control in the whole retirement planning realm is a willingness to deal with ambiguities or inexactness. At first blush this may sound strange, but most of the barriers, roadblocks, and detours along the retirement road can’t be formulated in advance. The way that you manage these complexities can be the determining factor between success and failure.
For the main, investors should ignore most of the conventional rules about what you can “safely” withdraw from your accumulated savings during retirement. There are risks inherent in everything you do in life and having a successful retirement mostly amounts to “becoming comfortable being uncomfortable” with these risks.
We advise clients that if they are willing to adjust portfolio withdrawals according to actual observed investment returns, they will likely be able to withdraw more over time versus a “set it and forget it” withdrawal rate. Because of living cost increases each year, most investors will likely need to maintain much of their accumulated savings in stocks for the duration of their lives. It is generally a mistake to think that you can “de-risk” your portfolio once you retire.
In more than 30 years of working with clients on the glide path towards retirement, I have only seen a few that were well prepared financially when they arrived here.
That’s part of the joy of our role. We get a front row seat in our clients’ financial life movie and have input into major choices along the way. These choices determine if they can continue to live the lifestyle they want. Ready for a real conversation?