It used to be so simple. That’s how we will be telling the story some day. A once-upon-a-time tale of putting your money in your 401(k), taking out-sized risks with it, caring less about the cost of your defined contribution plan and more about the potential growth. You focused on balance, not income. Your company matched and generously so and even once used their retirement plans as an incentive to apply for work or as investment leash to keep you there. You never questioned the choices in the plan, they were all doing well enough to allow you to dream of a day beyond the daily grind.
No we plan for retirement with caveats. This is a new world of “yeah, but” that offers us choices we didn’t have before and more than one we didn’t want. So let’s go through some of the altered state of retirement planning in the years after most of the investing public lost more than they wanted to lose.
Retirement income
This is the new mantra for the retirement planning specialists that sell your company plans, that met with you individually as advisers, and for the vast majority who opine on the subject of those post-work years. What used to be “see-how-much-you-can-retire-with” has now changed to “see-hom-much-income-you-will-need”.
Trouble is, this is even more nebulous that the former race towards a specific numeric goal. No less disheartening in part because we simply don’t know. So we tend to throw out a moving target of having enough income available on your last day of work to provide 70-80% of pre-retirement income. And the caveats immediately follow with: you might need more for luxuries, you might need more for health problems and the clinched that freezes all of us, the face-to-face confrontation with our own mortality, how long you might live.
I recently wrote about this new expectation of retirement: having your luxuries redefined in a way the previous generation never did. This presents us with a choice we don’t want to make. We extoll the virtues of budgets and many have learned to live within their means. But subtracting 20-30% from those budgets is surgery many would rather not do. Try it. The vast majority are unwilling to make the cuts or even try an live a month in financial austerity.
Most of us will have a mortgage payment in retirement (or at least at the traditional age of retirement) and that comes along with insurances and upkeep. We will still have taxes (a caveat in and of itself, suggesting that somehow we will be paying less in retirement when in fact, we might be paying more to the locales where we live even if we aren’t paying it to the IRS). Cars will need to be periodically replaced. And all of that free time we suddenly have will prompt you to spend more than you would have had you gone to work.
Recent studies have suggested that the first decade of retirement is the most expensive. The suggestion that we will need to withdraw no more than 4% of our retirement accounts to ensure that we never run out of money is unrealistic under these assumptions. In fact, the adjustments in reality are closer to 6-8% the first five-to-ten years and then dramatically adjusted downward as we age (a time when the studies also assume we will slow down, possibly victim to our own diminishing biological clocks).
Adding it Up
There was time when we embraced the idea of Social Security as a non-contributor to our retirement income. Although the vast majority have always relied on the program, many of the people who diligently invested in their futures using the tools available, disregarded it in the retirement income plan. It was, if anything, a bonus we might be able to count on, something we could theoretically wait to tap until the last possible minute.
Now, it is part of the equation and for some, a major entry on the retirement balance sheet. The caveat in this approach is that you should quite possibly be looking at your Social Security benefit as the basis for your income in retirement with your retirement plans (such as your 401(k)s, IRAs, and annuities) providing the added income boost. Try writing your plan on this income stream alone and get the best (worse-case scenario) look at your retirement years.
Your Health
I’m not sure about you, but when I turned fifty, suddenly I was much more attuned to the noises and internal hum that my body was producing. I’m trying to imagine this human mechanism at 60, or 70, or 80. The fact is, you just don’t know how much your health will cost you. Some have suggested that your needs over the course of your retirement could amount to $200,000 per person. That is in today’s dollars.
You can take steps while you are working to try an offset the possibility the life after work might be one trip after another to the doctor. But there is no guarantee it will buy you more time, or better time. So, if your spouse and you are both retired, a minimum of $400,000 in a health specific account is within reason.
Except, the caveat now being offered every where you turn: you might live longer than you thought. Yet no one suggests that will be a fulfilling longer.
Investments while you are (still) Working
This is probably the area of the biggest change in how you approach the concept. Investing used to be a go-for-the-gusto activity. Now it is a protect-the-powder sort of plan, one where you are focused on costs first and foremost, something that can only be accomplished with index funds or ETFs. And something that can only be accomplished if you embrace the working well past traditional retirement age mantra now being heard in every corner of the retirement planning community. It’s not their fault; its what you want to hear.
You’ve evolved and so have they. You want to be able to know exactly, to the penny, how much you will get each year. And to reach that goal, you will have to shorten the amount of time you will be retired – or put another way, how much longer you will need to work.
In the age of caveats, the decisions appear simpler. But the “yeah, but” difference is you, your willingness to know that retirement now comes with some sacrifices, both now and later. As Ralph Waldo Emerson once wrote: “Artists must be sacrificed to their art. Like bees, they must put their lives into the sting they give.” Your plan is your sting.
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