I have a grievance with the retirement planning industry. I feel too much focus is on the wrong thing and critical concerns are often neglected. Too many articles, too many planning calculators and too many planners make the goal seem like it is all about flipping a switch on a certain date. The day you retire is the beginning of a long phase, not an end goal. Picking the right date is important but there are other issues that need addressing to make your retirement phase enjoyable like a detailed retirement income plan.
Not Your Grandfather’s Retirement
Modern retirements can be long phases. This stage could last to be 25%, 30% or 40% of our lives and it can be a great time of life if you lay the foundation. To have this period of life be enjoyable means planning beyond the retirement date and is more than just saving a lump of money. Don’t live a third of your life by default, live it by design instead.
The 3 Big Uncertainties in Retirement
A good retirement income plan accounts for all your spending – your necessities and realistic wants, throughout retirement. In addition it needs to deal with the three major uncertainties of retirement income reliability:
1. Your income needs to keep pace with rising costs through the decades of retirement.
2. Your income needs to withstand the ups and downs of markets and the variability of returns.
3. Your income needs to weather the uncertainty of longevity and the varying spending of the phases of retirement.
There are methods that can address these uncertainties. I’ll share more in future posts.
A good retirement income plan addresses these questions and prepares you for the uncertainty of the future following the date you flip the switch. In many surveys of financial anxieties, the top fear is running out of money during retirement. The strength of this fear is why I think maximizing reliability of income outranks maximizing return on investment during the retirement phases.
Not an Annuity Pitch
Reliability of income is often used in annuity sales literature. Rest assured, this won’t become a pitch for annuities. There are other ways to get a reliable income without tying all your money up in a contract. I can’t lay out how to do that in one blog post but will post more in the future about different methods that can be used.
A Shift of Perspective
In my investment classes while earning my MBA a common measure used was ROI – Return on Investment. For financial analysts, investment managers and investors, ROI is important. But the switch to the retirement phase means a different ROI becomes important – Reliability of Income. I learned this term, the other ROI from Phil Lubinski a former advisor and expert on retirement income planning.
I believe too many people still focus on maximizing the traditional ROI or return on investment in retirement when most of the emphasis should be on the ROI that is important for retirees – reliability of income. There are three major strategies for planning retirement income. Your strategy has to fit your life, your resources and your personality. We’ll discuss the three strategies in future blog posts.
Everyone Needs a Retirement Income Plan
I find comfort in having a plan for the things that come after the magic date passes and after the magic number is achieved. Don’t let a focus on the date and number cause you to neglect thinking through how you’d like to spend your time, where you’d like to live through the three phases of retirement, how you’ll get around as you age, who you’ll be doing things with and how you’d like your healthcare issues managed.
Your income in your retirement phase shouldn’t be left up to fate. Not addressing these issues won’t make them go away. Don’t live your retirement by default, live it by design.