Three insights, two findings, one action (February 20, 2020)
Once again, it’s time to share three insights, two findings, and one action.
3 INSIGHTS FROM ME
I. Hope is not a strategy
Just hoping to retire is a sure way to not retire. There's too much at stake to leave to chance. Retirement shouldn’t rest on hope but a comprehensive financial plan based on clear objectives of what you want in retirement and the strategies needed to reach those objectives. You’ll know what you need to accomplish when you're clear on the objectives. And knowing what you need to accomplish starts with getting clear on and finding strategies for key retirement objectives such as the age you can retire, how you’ll meet spending goals, and manage risks. Retirement has little to do with hope and all to do with having a retirement plan with clear objectives and proven strategies to reach those objectives.
II. Think about tomorrow, today
Financial planning is primarily about arranging financial affairs today to accomplish goals tomorrow. This doesn’t mean a life of sacrifice today in pursuit of enjoyment tomorrow. However, it does suggest if you want to reach tomorrow’s goals, it requires intentional action and thought today. The key to enjoying today's journey to reach tomorrow's goals is balancing the needs of today with the needs of tomorrow by wisely allocating your time and resources to near and distant goals.
III. How to make your money last in retirement
Running out of money in retirement is one of the major challenges retirees face. And for a good reason. No one wants to spend years saving and sacrificing to find out the money won’t last. Fortunately, there are several steps you can take to increase the chances your money will outlast your life, such as 1) having a retirement spending plan, 2) continued earnings in retirement, 3) managing healthcare costs, 4) reducing spending, and 5) pensionizing other retirement assets.
2 FINDINGS FROM OTHERS
I. How should I spend my money in retirement?
Most would agree steps taken to maximize long-term spending in retirement is a good thing. But knowing what those steps are and how they fit in a retirement plan is something altogether different. One way to maximize long-term spending is to maximize long-term wealth, which means optimizing the portfolio’s potential for growth through retirement. According to a recent article from Retirement Researcher, a novel approach to doing this is to consider the order you draw from different investment accounts. While there are a lot of exceptions, the “normal” distribution order is as follows:
Required Minimum Distributions
The study makes clear there isn't a one-size-fits-all solution. And while this is the “normal” distribution order, the specific order for your circumstance depends on your broader situation. There are a lot of moving parts coupled with your specific circumstances that drive these decisions. After saving for retirement for so long, you want to make sure you get the most out of those savings so you can enjoy the best retirement possible. That starts with having a well-thought-out withdrawal strategy as part of a comprehensive retirement saving and income plan.
II. What is the retirement spending smile?
It’s widely thought spending remains steady throughout retirement. But according to research, spending desires (and needs) change over time. This consumption pattern represents a spending smile (see below), where retirees spend more early in retirement as they enjoy traveling, eating out, and other types of discretionary expenses. As they age, retirees tend to slow down and spend less. And late retirement consumption begins to rise again due to increasing healthcare costs.
This study clarifies that retirement spending patterns are an important component of choosing a sustainable spending rate. And constant inflation-adjusted spending is a simplifying and conservative assumption that could lead to under or over-spending that can diminish long-term retirement quality.
1 ACTION FOR YOU
I. One task you must complete to successfully transition into retirement
Well-established research indicates there are 15 developmental tasks you need to complete while still working to transition into retirement.
We’ll look at one of these tasks for our action item this week and reveal a new one each week.
The completion of these tasks does not suggest a person should retire. However, failing to complete the tasks will put a successful transition into retirement at risk.
This week’s task is associated with income and benefits: You must determine the steps necessary to receive benefits.
Why it’s important
To ensure the timely start of benefits.
To ensure timely receipt of benefits.
To ensure the continuation of post-retirement benefits.
To ensure coordination with other benefits.
To maximize benefit choice and value.
Have a Question? Want to chat about it?
Until next week,
Mark Sharp, CFP® RICP® EA