Ask The CFP® Practitioner
“Happiness is not ready-made. It is result of our actions.” – The Dali Lama
Question: The closer I get to retirement, the more difficult it seems to plan for my future. Is this normal?
Answer: The simple answer to your question is “yes, it is normal.” Until recently, retirees weren’t as concerned with “longevity risk” or the possibility of outliving their money. In 2008, the average life expectancy of a 62-year-old male was an additional 21.1 years, or age 83.1. In 1935, when the official Social Security benefit age was set at 65, life expectancy was only 61.7 years (3.3 years less than retirement age). It’s not abnormal to be confused about planning for retirement; the stakes are high.
Today, it’s possible to spend more time in retirement than in the workforce. Medical and nutritional advancements continue to increase life spans. Maintaining an adequate income during these bonus years is essential. This is why Baby-boomers are reinventing and redefining retirement. Phrases like “encore career”, “unretirement” and “worker 2.0” are now common.
Retirees face major modifications in their day-to-day lifestyles and finances. Satisfaction with the next phase of life depends on one’s awareness and responsiveness to these shifts. Contemplating these issues may be stressful, but living in retirement shouldn’t be if proper planning begins early.
In response to these worries and fears, a number of pre-retirees plan on retiring later or finding another job. Unfortunately, layoffs, illness or the inability to find a replacement job is all too often the reality. According to the Employee Benefits Research Institute (EBRI), there is a large gap between the expected age of retirement and the actual age of retirement. Studies show that the average age of “expected” retirement is increasing although most people end up retiring before or around age 65. You may think you’re going to work longer, but this isn’t always the case.
Our brains are hardwired to focus on the present. Most folks perceive retirement to be off in the distance; no matter how close it may be. Once retirement is at hand, the brain accepts the “new reality” and faces new challenges as they arise. Age-related changes might also affect how we process information and make decisions.
The natural aging process, cognitive impairment or further aggravation due to dementia or senility can harm otherwise sound plans. Emotionally-based decisions may be counterproductive without a proper financial base. Overspending in the early years can deplete the nest egg disproportionally, creating unnecessary stress in the future. This is where having a written plan can help.
“Loss aversion” describes the lengths one will go to in order to avoid the pain of taking a loss. Those approaching or in retirement tend to have legitimate and greater concerns about losing assets as they leave the workforce. When newly retired investors start withdrawing and depleting assets, their mindsets have a way of changing. Loss aversions tend to increase with age while willingness to consider growth investments lessens. Again, a formal plan may help address this issue.
Retirees tend to treat money differently depending on its source. Some investors like to receive a “salary”, or systematic withdrawal from retirement funds earmarked for fixed expenses. This mental accounting requires self-discipline, logic and planning as outlined below.
Five Easy Pieces:
1. Retirement Brain – Shifting from wealth accumulation to decumulation requires conscious changes.
2. Realistic Priorities – Evaluate cash flow and income sources, then decide whether you can meet your goals, or need to make necessary adjustments like retiring later, reducing expenses or a combination of the two may be your solution.
3. Develop a Strategy – Visualize and plan on how you will deal with the inevitable volatility of the markets if you choose to invest.
4. Document your Plan – Investors with a written plan consistently accumulate larger nest eggs and stick to their plan.
5. Balance and Fine-tune – The five years prior to retirement and the first five years during retirement are especially important. Formulate, revisit and refine your plan as necessary.
It’s said that money doesn’t buy happiness. However, adequate financial resources do make it easier to provide for a safe and comfortable living environment, health needs and the ability to stay connected with those you care about most.
As we grow older, we may realize that asking for advice and direction from those with knowledge and experience is a sign of wisdom, not an admission of failure. Planning actually contributes to happiness by decreasing worry. Stay focused and invest accordingly.
Opinions expressed herein are those of the author and subject to change at any time. Information obtained from outside sources is believed to be reliable.
“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame design) in the U.S.”
Darcie Guerin, CFP®, is Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email [email protected] www.raymondjames.com/Darcie