There are thousands of resources that tell you how to manage your retirement savings while you’re still working for that nest egg. So why are so many new retirees suddenly paralyzed with financial fear when they finally quit working?
Some of it is natural; retirement is a big lifestyle change and many people question whether they’re spending too much during that first crucial year. Surprisingly, freedom can be very expensive. But that nervousness may also be an indication that an individual hasn’t received as much instruction in how they will spend during retirement as they’ve received saving for it.
A huge nest egg – or a nest egg that seems huge – sounds great. But the death of traditional pensions and the rise of (often-underperforming) self-directed retirement plans have made it tough for individuals to easily predict what they’ll actually have to spend. And without a complete plan that takes into account personal circumstances, financial goals, inflation, the rising cost of health care, increased longevity and ultimately long-term care, retirement money probably won’t last as long as you do.
As the official Baby Boomer retirement wave begins, some financial advisers have begun to elevate the discussion to post-retirement spending and investing as a way to repair pre-retirement planning. Individuals who have worked with financial and tax advisers including CERTIFIED FINANCIAL PLANNER™ professionals, should have a much clearer picture of how they should manage their spending in the first five years of retirement.
If you haven’t, it’s time to get some help.
For potential retirees who want to eliminate those first-year jitters, here are planning ideas to implement as soon as possible:
Define a vision of retirement and revisit it every year: Anyone who has worked successfully with an investment manager or financial planner has addressed the kind of retirement they want and how old they’ll be when they start it. A retirement that includes world travel and a general increase in leisure-time spending may, believe it or not, cost significantly more than a pre-retirement lifestyle with a 60-hour workweek built in. A retirement with rewarding part-time work built into the picture might make the other goals more affordable. A person who manages his or her finances or works with an expert needs to revisit those goals annually to assess whether they will still be able to afford a particular style of retirement at the age they plan to start it.
Track working-life expenses for 3-6 months: This is where that vision of retirement starts getting real. Knowing for the first time what an individual spends on lattes and late-night carryout may cause a radical shift in behavior -- from spending to saving.
Create a worst-case health scenario: For many, the biggest spending issue post-retirement is end-of-life care. That may mean paying for expensive experimental treatments to fight disease or long-term assisted or nursing home care. Some projections put annual nursing home costs at more than $100,000 a year in the next two decades compared to their current annual range of $45,000-$60,000. While public aid picks up medical expenses for those who exhaust their assets in most states, most of us want more than minimal standards of care.
Build several annual budgets: There are many rules of thumb that govern retirement spending. A popular one is that no one should spend more than 4 percent annually of the present amount in their nest egg. Another is that retirees only need 70-80 percent of their last working year’s income to be comfortable. There really is no one-size-fits-all solution because spending decisions are different at all stages of retirement. Since computers make this possible, every investor might consider doing one or more annual budgets that build various risk scenarios into their plan.
Shift into a retirement investment strategy in stages: With a clear majority of investors having inadequate retirement funds in place near or at retirement age, it may seem silly to talk about investing post-retirement. But the younger an investor is, the more valuable the conversation. With so many portfolios yet to recover from the 2000-2002 stock market slide, many investors have shifted their portfolios into real estate or other fast-growing investments that may leave them undiversified and subject to bubbles. Good advisers can help build more balanced portfolios that fit the exact needs of the investor as retirement nears.
November 2005— This column is produced by the Financial Planning Association®, the membership organization for the financial planning community. If you use all or part of this column, please credit FPA® or one of its members. To connect with a member of FPA for your story, call FPA’s Public Relations Department at 800.322.4237, ext. 7172.
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