Francis Bacon wrote, “A prudent question is one-half of wisdom.” Just as the theory of manifestation maintains that if you focus on an outcome long enough it will ultimately materialize for you, asking a few questions over and over again will often lead you to their best answers. For instance, when we don’t know what to suggest to a client, we sometimes take a moment to look at the question/problem from different perspectives and in different contexts — taxes, risk, liquidity, etc. By asking the question many different ways, we can often come up with a much better recommendation for helping our clients become more secure in their planning.
The ten years before retirement are often called “the fragile decade.” Most people think this is just another way of suggesting they be more defensive because their remaining cash-generating years are too limited to recoup a large loss. However, that is not all that’s implied. The markets and their returns are always volatile and that will not change in the future. You simply have no control over them; you can control your own individual risk but that is about it. The markets simply don’t care if you are retiring in ten years or in ten minutes.
“The fragile decade” is really about asking yourself the right questions as you approach retirement, and doing this regularly. Asking the right questions will force you to look more carefully at your retirement plans and possibly make some necessary changes before you cash your last paycheck.
1. What will my income be in my retirement and how much of it is guaranteed?
It’s necessary to take a close look at your streams of income in retirement. Will you get Social Security? If so, how much? Are you one of those lucky people with a pension? Do you get both your pension and Social Security or does your pension reduce your Social Security payments?
In retirement, you will need to generate enough income to keep your way of living afloat. Analyze how much you will need and where it will be coming from. Then look at your likely taxes and estimate how that will affect your income strategies.
Your investments are no longer simply pots of money you are encouraging to grow. Now they need to generate your income as well, so you need to take a hard look at them. A good place to start is to calculate your projected withdrawals, and the rates of return necessary to offset those withdrawals. Doing so ten years before retirement allows you to make changes if and as they become necessary.
2. Is there enough liquidity and flexibility in my planning?
Things are constantly changing — certainly we can all agree with that statement. What will things be like in twenty years, ten years into your happy retirement? Will inflation be at its historical 2.7% or will we be living through another hyper-inflation miasma? Will electricity be the main source of “fuel” for your vehicle? If so, how much will it cost to upgrade the panel at your house to support its needs? Will your daughter, who was once thriving in her married life, encounter tragedy and become a permanent fixture in your home, along with her growing children? As Ferris Buller says, “Life moves pretty fast.” Having the ability to make the necessary financial adjustments to help you cope with unexpected change is absolutely vital to your being secure in your retirement. The ability to make future changes as necessary is often overlooked in planning discussions. We always tell our clients that the plans we put together for them are at their best on the day they’re created, with entirely current circumstances and information. In a relatively short time, those circumstances or that data might change so drastically that an entirely new approach is necessary. Any plan is simply a starting point, one that requires continued monitoring, discussion, and — quite possibly — appropriate responses. Flexibility is key. Check out our previous blog on this subject: click here.
3. How much risk am I taking on with my investments?
I know, I know. I said before that the rate of return should not be your major focus during the ten years before retirement, and I stand by that, but the question of risk vs. return is one you should be asking yourself at all times. In your twenties and thirties and all the way through retirement, you should repeatedly assess the amount of risk you’ve taken on. While we as investors can’t control what the markets do, we can control the amount of risk we are willing to assume. Most people are at higher risk in their investments than they should feel comfortable with. Some want a higher rate of return and figure they can just jump out of the market if it starts to nosedive. There are two problems with this approach. One is that you might, if you’re very lucky, be able to get out of the market in time, but what is your plan for getting back in? Where is the bottom? When people try to time the market, they invariably miss the majority of the twenty best days of the market year, which can ultimately harm their portfolios more than riding the downturn. The second problem is that you can easily miss getting out of the market in time to avoid major losses, which will create a level of anxiety you wouldn’t believe unless you’ve lived through it. As Peter Lynch, President of Magellan Fund, often said, “The important organ here isn’t the brain — it’s the stomach.” Instead of shooting for the stars and taking a chance your equipment will blow up, why not take a more comfortable ride, one that’s organized and planned so you can have a good idea how your investments will fare in given markets and circumstances, and you feel comfortable with your expected outcomes.
Regularly take stock of how you are invested. Many people don’t realize the amount of risk they are assuming when their only investment is that target-date fund in their 401K. They might fit the right age range for the fund, but that doesn’t mean the risk is right for them. When you hear people talk about the crash of 2008-2009, many will tell you their 401Ks became “201Ks”. Most of them never knew how much risk they had taken on and how much downturn risk they were exposed to. When you are investing in the market, you must assess and reassess your position regularly, and control whatever you can control, which means you must understand and chose the level of risk you are willing to assume.
If you consistently ask these three questions over the next ten years, and answer them carefully, you will be far better off when retirement finally arrives. You will be prepared and you will have a more comfortable and less stressful retirement as a result. To take this on by yourself can often seem an overwhelming responsibility. If this is true for you, reach out to us and we will help you look at these questions from all sides.