3-2-1 Newsletter (6-11-2020)

10-Minute Read

Please enjoy this list dominated newsletter edition with 3 provocative insights, 2 intriguing findings, and 1 useful action to reduce retirement costs.

3 INSIGHTS FROM ME

I. 10 traits necessary for a successful retirement

Over the years I have tried to compile a list of essential characteristics integral to a successful retirement. It’s not a simple task as no two retirements are alike. However, I have noticed some commonalities that apply across the board. Whether you’re looking for insights to prepare for retirement or tips to make the most while retired, here are the traits common to successful retirements. 

• Have a clear vision of retirement and well-thought-out strategies to move vision to reality.

• Have a strong connection with your future version of self (most impactful).

• Have a commitment to align actual practices of life with this future version of self.

• Have an early, consistent, and long-term commitment to savings (2nd most impactful).

• Assume you will live a long life. 

• Keep focus on reducing debt and lowering expenses (3rd most impactful).

• Be attuned to personal finance topics and engage financial professionals as needed.

• Prioritize making better tax decisions to increase after-tax income.

• Use reasonable expectations for life expectancy, income replacement rate, investment returns, inflation, and tax rates.

• Properly manage risks.

Retirement planning is complicated. There are so many details to be thought through, such as how much and where to save, when to take Social Security, and how to convert assets into income. While these are bewildering, the underlying principles can be generalized to apply to just about everyone. Successful retirements all share a commitment to a core set of traits. Incorporating all or some of them can be the difference between a fulfilling retirement or one that’s less than hoped.

II. 5 easy ways to save for retirement 

No one ever said saving for retirement was going to be easy. By some accounts it’s the most expensive purchase people will make over their lifetimes. Saving for retirement is difficult because many have trouble balancing other financial responsibilities. Couple this with the fact that most companies no longer offer a defined benefit pension as a way to reliably fund retirement. As a result, pensions have all but been replaced by defined contribution plans like 401(k) or 403(b), where more of the responsibility of saving for, investing, and funding retirement is shouldered by the worker. Of course, simply saying individuals need to save for retirement isn’t enough, and not all guidelines for how much they should have by a certain age work for everyone. 

Here are 5 of the easiest and effective ways to save for retirement:

1. Picture your future: If you can visualize what you want, you’ll have a much greater chance of achieving it.  

2. Set up auto-enrollment and auto-escalation: Taking advantage of auto-enrollment and auto-escalation, where employee's plan participation is automatic and the contribution rate increases each year, are two of the most advised ways to easily save for retirement without thinking about it.

3. Make an additional loan payment: Paying down debt is another form of saving because having no or less debt means having less expenses, more to save, and less required savings, which reduces the cost of retirement. 

4. Do some homework: Solving problems before or in early retirement, at ages 60 or 65, is much less painful than discovering and solving the problem at age 90. Whether you embark on self-study or engage a financial professional, learn the things most important to your retirement sooner than later.

5. Start early: Time and patience are your two greatest allies while saving for retirement. Starting early, no matter the amount, allows the benefits of compounding interest to work its magic.

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III. 5 hacks to increase retirement cash flow

Income and cash flow are king in retirement, as goals and risks have to be funded. If you’re experiencing a cash flow crunch or just want a little breathing room in your current monthly budget, here are some strategies to consider to increase retirement cash flow. 

1.  Figure out ways to maximize Social Security benefits.
2.  Use a reverse mortgage to tap home equity.
3.  Make better tax decisions to increase after-tax income.
4.  Annuitize a portion of income.
5.  Reduce expenses.

2 FINDINGS FROM OTHERS 

I. Pandemic Will Mean a Worse Retirement for Millions of Workers

Retirement already had enough challenges. It didn’t need any help from a pandemic. But some think that’s just what might happen. This is particularly bad news for older workers because in a typical recession, not many lose their jobs. That's not the case this time. Data shows older workers are getting hit harder than those who are 25 to 54. Older workers face not only unemployment but the prospect of poverty, with pressures on 401(k)s and other retirement accounts being dragged down by the market, drained to pay for more immediate expenses, and suspension of 401(k) match programs. Adding to this, older workers face stiff challenges in getting re-employed due to age discrimination and higher-earning expectations.

The bad news doesn’t stop there. An indirect consequence of the pandemic’s impact on older workers is the hit to Social Security. High unemployment means fewer workers and employers are paying payroll taxes coupled with more older workers filing early for Social Security benefits. This last point is particularly troubling because claiming benefits before full retirement age will reduce monthly benefit amounts for the rest of their lives. All of this places additional pressure on an already strained Social Security trust fund that was projected to run out in 2035 unless Congress takes action. 

What all this means is people are going to rely heavily on Social Security in retirement. That’s nothing new, but the system was meant to be part of a “stool,” along with private pensions and personal savings. Now, all three legs are at risk. 

Pandemics are bad news for just about everyone but particularly older workers who depend on employment to meet not only immediate living expenses but also opportunities for continued retirement savings and increased Social Security benefits. This places more emphasis on other income strategies to fund retirement such as annuities, housing wealth, optimal use of savings, and tax-efficient distribution strategies to help make retirement savings last longer. 

Source: Pandemic Will Mean a Worse Retirement for Millions of Workers

II. Estimating the True Cost of Retirement

David Blanchett, CFA, CFP®, AIFA – Head of Retirement Research, Morningstar, on Estimating the True Cost of Retirement:

“There’s been this noted effect in research called the retirement consumption puzzle.  Either at retirement or during retirement, people don’t tend to increase their consumption by inflation. This takes place to some effect at retirement; mostly because people that retire tend to make more meals at home versus eating out.

But a more important effect is how consumption changes during retirement.  On average, as people age, they tend to slow down.  So they transition from the go-go years, to the slow-go years and the no-go years. They tend to spend less, they tend to be less mobile, so that obviously affects their overall consumption. The retirement spending smile suggests that younger retirees tend to actually increase their consumption a little bit more, or it tends to go down less than middle-aged retirees. So between the ages of say 70 and 80, it tends to bottom out.  Expenses tend to tick back up after age 80 because of healthcare costs.  What you see is a very large difference in what would be considered a safe withdrawal rate from a portfolio.  If you were to use this assumption that people tend to increase their consumption every year by inflation, you might say that a 4 percent withdrawal rate hypothetically is safe. If you model actual inflation, in terms of how the consumption changes for retirees, what you’d see is that 5 percent is the right number because in reality, if you do decrease your consumption over time, you don’t have to have as much saved for retirement.”

Takeaway: Traditional retirement income planning assumes a steady inflation-adjusted spending rate through retirement. However, studies show retirees don’t spend at a constant inflation-adjusted rate, and assuming this distorts the retirement picture and overstates how much you need to have saved. 

Source: Estimating the true cost of retirement

1 ACTION FOR YOU 

I. Improving retirement outcomes by reducing costs

Prudent retirement income planning begins with identifying and implementing the actions necessary to support goals while protecting against risks that stand in the way of those goals. Undertaking the right actions consistently before and during retirement is crucial to your golden years. 

We’ll look at one action item to take and reveal a new one each week.

This week’s smart habit: Apart from having sufficient savings, reducing retirement expenses has the greatest impact on retirement success. Things like a big mortgage, expensive car payments, financial commitments, and outsized discretionary spending can sink the best retirements. This week’s task is centered around identifying essential and non-essential expenses.  This could look something like the table below. 

Knowing which expenses are necessary and which are optional is important because it will allow you to determine what can be reduced or outright eliminated. Once you’re clear on what's actually needed vs. what's not, you’ll have a more accurate picture of your true retirement needs, and that just might be less than you originally thought! 

WHAT'S NEXT?

Have a Question? Want to chat about it?

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Until next week,

Mark Sharp, CFP® RICP® EA

Mark Sharp Retirement