There are so many things that sound great in theory, but aren’t always great in practice. Take retirement for example. No work. Loads of free time. Travel. Those all sound great (and most of the time they are), but I’ve had retirees complain about every single one of them at one point or another over the years. That’s why it’s so important to think about your plans and ask yourself this question before you enter retirement:
Do I really want this or do I just think I want it?
Another way to ask that might be “Do I want this in theory or in practice?” Ask it of every major item on your retirement “To-do” list. The only real way to answer that question is to experiment with your plans. In other words, you actually start doing things. Shocking concept! You need to take all the things you have planned for “Someday” and start experimenting with them today.
This is not a trivial exercise. It turns out that we’re pretty bad at predicting the things that will make us happy. Scientists like Dan Gilbert at Harvard have done research that proves this. So experimenting and doing the things on your list is a critical step to determine whether you’re on point or you need to go back to the drawing board.
And don’t feel bad if you don’t have things totally figured out. None of us do. That’s what experiments are for. Ralph Waldo Emerson once said:
“Do not be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better. What if they are a little course, and you may get your coat soiled or torn? What if you do fail, and get fairly rolled in the dirt once or twice? Up again, you shall never be so afraid of a tumble.”
Take those words to heart. Don’t wait. Get out of the lecture and into the lab. Experiment. Test. Refine. Who cares if it’s not perfect. Who cares if you get dusty or bloodied. You’ll learn from it and get better. Just start trying things. As you do, your brain will make certain connections, you’ll meet people that will be integral to your plans, you’ll develop skills you need, you’ll build confidence, you’ll sharpen your focus. None of that stuff happens overnight. You can’t flip a switch and have total clarity regarding your purpose, plans and priorities. It takes time. The sooner you start, the better prepared you’ll be to make the most out of your retirement years.
“Will my money last?” That’s the biggest concern for most retirees. What can you do to stretch your retirement dollars for as long as possible? A recent article in the Journal of Financial Planning (JFP) analyzed six factors and the role each played in portfolio longevity. (Determinants of Retirement Portfolio Sustainability and Their Relative Impacts, by Jack C. DeJong Jr., Ph.D., CFA; and John H. Robinson). Let’s take a look at each:
Initial withdrawal rate
The less money you take from your portfolio each year, the longer it will last. No surprise there. What is somewhat unexpected, however, is that the withdrawal rate that is considered “safe” is shrinking. Thanks to lower assumed bond rates, the long held 4% rule should probably be renamed the 3% rule for those who need their portfolio to last 30 years. That’s one conclusion reached by the JFP article and it is backed up by other studies from respected researchers like Michael Kitces and Wade Pfau. So if you anticipate a long retirement, and you think bond rates will stay near their historic lows, it’s probably a good idea to dial back your initial withdrawal rate. If, however, you saved more than needed, retire later or have health issues that shorten your retirement (e.g. 20 years instead of 30) the 4% rule will likely hold.
The Fed’s decade long experiment with low interest rates has been great for borrowers, but terrible for retirees. Generating income is harder than ever. When the initial research was done for the 4% rule, mean bond rates were around 5-6%. Now they are much lower. Lower returns mean your portfolio won’t last as long. It looks like rates will stay low for the foreseeable future. Plan accordingly.
Retirees typically invest in both stocks and bonds so they can balance out the need for growth with the need for stability. What’s the right mix? Several recent studies seem to suggest that dialing up stock exposure a bit (say from 60/40 to 70/30) might help improve portfolio longevity. Before taking that advice, however, I think there are three important considerations. First, what is the likely future return of stocks? The studies assume a lower return for bonds, but assume future stock returns will be similar to past stock returns. When stocks are as richly valued as they are now, however, future returns are generally lackluster. Second, how will you respond in the face of increased volatility? The studies assume that retirees will calmly ride out any increased volatility from the higher stock allocation. That flies in the face of what we know from both behavioral finance studies as well as the long running Dalbar study on investor behavior. Volatility often causes people to do the wrong thing at the wrong time. Third, how much return do you need? If you haven’t saved enough, it can be tempting to swing for the fences and heavily overweight stocks. If you nest egg is adequate, however, it might make more sense to swing for singles and doubles rather than risk striking out. The takeaway from all this? Don’t take the added risk unless necessary. And if you decide to increase your stock allocation, wait for a good opportunity, such as after a market correction. Stocks will be cheaper and bonds will likely have rallied.
Inflation mutes your investment returns and diminishes your purchasing power. For retirees, low inflation is better and will help portfolios last longer. You can’t control the inflation rate, but it’s helpful to know what it is. We’re currently in a prolonged period of low inflation around 1-2%. That can help improve portfolio longevity and offset the lower expected returns discussed earlier.
Investment expenses act as a headwind against returns, so it’s important to a) keep them as low as possible and b) make sure the people you hire are adding value. In a large study on the value of advisors, Vanguard concluded: “Left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.” This type of behavior often leads to “wealth destruction rather than creation.” Vanguard suggests that advisors can help add value if they “act as wealth managers and behavioral coaches, providing discipline and experience to investors who need it.” Specifically, they say to look for an advisor who can help with things like asset allocation, security selection, behavioral coaching and distribution strategies. According to Vanguard, those things are worth about 3% per year in net returns. In other words, a good adviser creates value, but has reasonable fees. The JFP article found that portfolio longevity is greatly improved when expenses are limited to around 1%, but diminish significantly when expenses rise beyond 2 or 3%.
Distribution strategies come in lots of different flavors, but the goal is usually the same: turn your assets into an income. The JFP article tested 4 different withdrawal strategies: a) spend stocks first, b) constant allocation, c) simple guardrail and d) spend bonds first. Most of those are self-explanatory except the guardrail strategy. With that strategy, withdrawals are taken proportionally from stocks and bonds with one exception. No withdrawals are made from stocks following a down year. Most retirees use the constant allocation strategy (draw from asset classes proportionally and rebalance each year), but the study found that the two strategies with the highest success rate were spend bonds first and the guardrail. Both strategies reduce the likelihood that you’ll have to sell assets for a loss during the early years of retirement which, not surprisingly, will help your money last longer.
I’ve helped many people transition into retirement over the years and when I ask a new retiree how things are going, the response is generally positive. That said, retirement is a huge transition and there are always unexpected feelings or emotions that crop up. That doesn’t necessarily mean that there’s something wrong with your retirement. It just means that you’re normal. So don’t be surprised if you feel one or more of the following:
The Problem: I feel guilty.
This is surprisingly common and I’ve seen it manifest itself in two ways. The first is guilt if you’re not doing much or making the most of your time. You finally have some free time and you struggle with how to use it. You feel guilty because watching T.V. or running errands doesn’t quite feel like sucking the marrow out of life.
The second is guilt if you’re doing fun stuff that your friends and family aren’t doing because they’re still working. I’ve actually had clients hesitate before responding to me when I ask “What did you do today?” The answer is “I went golfing” or “We saw a matinee and then went for a walk” but they are hesitant to say that because they know I spent my day behind a desk. When prodded, they say they don’t want to make others feel bad or come across as boastful.
For the first type of guilt, don’t worry! You’ll get better at it. You control a much bigger piece of your time in retirement and that takes some getting used to. Work hard to do things that leave you feeling happy and fulfilled, but keep in mind that not every minute of your day has to be spent bungee jumping or traveling. Sometimes the best way to spend a day is binge watching House of Cards on Netflix.
For the second type of guilt, just allow it to pass. Don’t become an insufferable braggart, but don’t feel guilty about enjoying your life either. You worked hard and made good decisions. Enjoy your time.
The problem: I’m second guessing my decision.
Buyer’s remorse is a real thing. Chances are you’ve felt it if you’ve ever bought a house or had to make some similar big decision and feared making the wrong choice. It can creep up after retirement as well and cause you to question whether you should have retired in the first place.
I have a client who has been dealing with this lately and she shared something that I thought was really insightful. She said, “Whenever I second guess my decision, I focus on why I retired in the first place.” Her choice would have been to work for five more years, but two things happened: Her mom was diagnosed with Alzheimer’s and her grandkids were all at an age when hanging out with grandma was just about the best the thing ever. If she had stuck to her timeline and worked for five more years, there’s a pretty good chance that her mom may no longer be around and her by then teenage grandkids will have priorities other than grandma. In other words, she gave something up, but got something far greater in return. There are pros and cons with most decisions in life. Retirement is no different. Keep that in mind.
The problem: I feel disappointed.
Most of us have an idealized view of retirement. Add years of anticipation to the mix or a personality that enjoys the structure and challenge of work and it’s not uncommon to feel a bit underwhelmed after entering retirement.
The best way to avoid disappointment is to retire TO something rather than FROM something. If all you do is subtract things—work, obligations, commitments—you simply create a void in your life. That void can open you to self-doubt, regret, lack of purpose and boredom. Nature abhors a vacuum. If you take something out, you need to replace it with something else (e.g. travel, school, a second career, hobby, etc.). The goal is not to do nothing. That just creates a void. The goal is to do what excites you.
And test those plans out before you retire. I most often see disappointment arise when a person has prepared for retirement using all lesson and no lab. In other words, all of their retirement plans are in their head or on a sheet of paper, and they haven’t spent any time actually testing and refining those plans. Reality can’t compete with 40 years of idealized assumptions.
The problem: I feel like a fish out of water.
No matter how prepared you think you are for retirement, you will probably still struggle. It’s a huge transition. The routine you’ve had for the last 40 years is out the window. That can be a bit disorienting for many people.
When talking with a client recently, she compared retirement to becoming a parent for the first time. “Before becoming parents we read books, painted the nursery, sought advice from other parents and bought all the cribs, carriers and countless other things that parents need. We thought we were totally prepared. And then we had our first child and all that went out the window. Retirement is similar. As prepared as you think you are, you really can’t grasp what it takes or what it will be like until you’re actually living it. Your experience will be totally different than the guy next door.” Great advice. Yes, there are tons of things that you can and should do to prepare, but the battle is always different than basic training. Don’t get discouraged. You’ll figure it out and get better at it with practice. Focus on living the life that you want to live. Imagine your ideal life and then work backwards from there to figure out the most direct path to where you want to be. Focus intently on the things that matter to you and throw yourself into them wholeheartedly. That kind of focus and tactical thinking will help you rapidly flatten your learning curve and smooth your transition into retirement.
Remember that retirement is not a date on the calendar, it’s a life stage that will last for years. Think back to when you first became an adult. Were you better at it at 28 than you were at 18? Of course. The same will be true with retirement. It might feel a little awkward at first, but you’ll get better at it over time.