Think about how many years of your adult life you spend accumulating enough money in order to have financial security and the lifestyle you desire when you stop working for money. You do your best, save as much as possible, live within or below your means, fund your retirement accounts, maintain a low cost, well diversified investment portfolio, and then the big day arrives, and you say adios to your job, career or business.
Suddenly, all those years of saving and accumulating come to a screeching halt and instead of being in the accumulation phase, you now move into the distribution phase with your money. On paper, theoretically, this all makes sense, right? Your nest egg now needs to last your entire lifetime. No worries, right?
In the nearly 11 years of specializing in retirement planning, I’ve yet to see an individual client or couple not initially have a minor freak out session once this reality sets in. And these sessions are equal opportunity offenders regardless of net worth.
I’ve observed clients with many millions in the bank initially get just as stressed and worried about running out of money down the road as clients with much less saved up. It’s why I pay particular attention to the emotional aspects of this life transition. When you go from working full-time and collecting your paycheck regularly to suddenly being labeled as “retired”, the emotional impact is often striking.
For better or worse, we tend to derive much of our self-worth from not only what we do and what we have, but even more importantly from our net-worth. For men especially, this loss of career identity along with no longer receiving employment income to validate our self-worth and self-esteem creates a double whammy.
In talking with many of my now retired clients that made the transition successfully to the ‘other side’ they recall feeling lost and out of sorts the first few months of making the transition. For many, second guessing whether they retired too soon seems to be the most prevalent feeling. Usually, by month four, the majority of my newly retired clients have got their mojo back and most seem to adapt and move forward pretty successfully.
Meet the “Joneses”
For 35 years, Cindi and Emily 'Jones' watched their spending and pinched their pennies, all to be able to retire one day with few financial concerns. They read the seminal book on money, Your Money or Your Life, back in 1992, and were determined to be smart with their money. The mortgage on their Berkeley home was paid off in full two years ago, they have zero debt and drive cars that are five and seven years old respectively. They are frugal meisters without a doubt. And as with a few of my other clients, we compete annually to see who has found the most money during the past year.
Last August they were married and the following month they both stopped working for money. Although technically ‘retired’, they prefer not to use the ‘R’ word. The retirement income plan we developed has them withdrawing approx. 6% from their joint savings for the first 5 years, then it begins to gradually taper off but remain dynamic. Although many financial advisors suggest a maximum withdrawal rate of 4% annually, Laura and Emily wanted a more customized and dynamic spending plan that meshed closer with their lifestyle. That was music to my ears.
These Joneses do not worry about running out of money and here’s why.
- They have owned investments during periods of bad economies and bad markets. They have made good decisions and bad decisions and learned why their choices were either good or bad. This gives them confidence in their investment plan and should allow them to maintain a balanced portfolio indefinitely.
- They have the ability to reduce their expenses without having to limit their lifestyle. Most of their spending is truly discretionary and because they have strong money management systems in place, they can feel comfortable employing the dynamic spending plan we developed rather than a rigid one-for example, a 4% annual withdrawal model.
- Because they have flexibility in their spending, they do not believe they need a high level of certainty to proceed with the spending they currently enjoy.
- Perhaps most importantly, we have done real comprehensive financial planning together. This helps them better understand the range of possibilities and the trade-offs that apply to their decisions. Financial planning is a collaborative ongoing process, not a onetime event. They know we will revisit our assumptions and incorporate whatever changes may come.
Lastly, what has garnered the most confidence is that we have identified the trigger points that would warrant a scaling back of their withdrawals. This will be important if we hit a down stock market again, if they underestimate their spending or if future returns are as low as some believe they will be. We have also identified trigger points to resume higher spending levels should the couple experience better-than-expected results.
The planning work we have done together doesn’t offer any of our analytics as a crystal ball. It simply identifies what can get off track and exactly what we should do about it. The Joneses in other words are prepared.
There is an adage in life, “Pressure is something you feel when you are not prepared”. Well prepared Spiritus clients embarking on retirement can enter the unknowable future with confidence that they can adapt to whatever may come their way.
Photo credit Martin Abegglen