Annual retirement review checklist

Annual retirement review checklist

Retirement has a lot of moving parts and when you consider that it could last for thirty years or more, it should come as no surprise that it will have several distinct phases.  Sixty-five will look different from seventy-five, which will look different than eighty-five.  The world, your health, your finances, your responsibilities, and your priorities, will be dynamic and ever changing.  Because of that, it’s important to review your planning and circumstances each year and make whatever course corrections are necessary to keep you on track.  Below is a list of questions to ask yourself each year to help determine if any changes or adjustments are in order.

1)    Is my withdrawal rate sustainable? The answer to that question depends on many things, including investment performance, inflation, how long you live, and, not surprisingly, luck.  Running out of money is not a pleasant option, so you should periodically evaluate your distribution strategy to see if it is sustainable.  A good rule of thumb is to keep withdrawals at 4 percent or less of your overall portfolio.  Everyone’s circumstances are different, however, so meet with your adviser to make sure your income lasts.

2)    Is my income still sufficient and keeping pace with inflation? Inflation is constantly eroding the purchasing power of your money.  That means you will likely need to pay yourself more and more with each passing year simply to buy the very same goods and services.  Consider a day in the hospital.  In 1980 it cost $340.  That same day in 2010 cost $5,310.  To offset the impacts of inflation, most people need to continue to grow their portfolio, even after retiring.  That means you can’t shun risk altogether.  You’ll likely need a well-diversified portfolio of stocks and bonds in order to keep pace.  That leads us to number three.

3)    Is my asset allocation appropriate? Simply put, asset allocation is the process of spreading your investments among stocks, bonds, cash, real estate, commodities, and foreign securities.  Research shows that asset allocation is extremely important.  Not only does it help to minimize risk, but studies show that it is responsible for nearly 90 percent of your overall return.  As markets fluctuate you will likely need to rebalance your portfolio to get your allocation back to your intended target.  In the same way, if your goals and objectives change, you should adjust your allocation to match.

4)    Is the amount of risk I’m taking still appropriate? Too often people discover their tolerance for risk only after they have exceeded it.  This can be a painful lesson any time, but it is devastating to someone in retirement.  This is easy to see when you consider the arithmetic of loss.  Any investment loss you experience requires a considerably larger gain just to get back to even.  For example, if your portfolio loses 50 percent, you would need a 100 percent return just to get back to where you started.  Most people in retirement don’t have the luxury of waiting around for 100 percent returns.  Better to avoid the loss in the first place.

5)    Has the value of my assets changed significantly? Once you retire, you need to turn your assets into an income stream.  The bigger the asset, the bigger the potential income stream.  Big swings in net worth, like a large inheritance or a significant market loss, affect the amount of income your portfolio can generate.  You don’t want to run out of money by taking too much or live miserly by taking too little.  Any time the value of your assets changes significantly, reevaluate your withdrawal rate and your asset allocation to make sure they are still appropriate.

6)    Are my beneficiary designations up to date? You might not realize that your beneficiary designations (like those on your IRA, 401(k), and life insurance policies) override your will.  If your will leaves your life insurance to your kids, but you never updated the beneficiary designation on the insurance policy after your divorce, your ex is getting the money.  As you can see, it’s important to periodically check your beneficiary designations to make sure that they reflect your current intentions.

7)    Have any of my sources of income been impacted? Personal savings is only one source of income during retirement.  You will likely also receive Social Security and possibly a pension.  If your spouse dies, that might cause the pension to go away or be reduced. Worse, if the company you worked for goes bankrupt, your pension might get taken over by the Pension Benefit Guarantee Corporation and be significantly reduced.  Social Security is on an unsustainable path and your benefits there might be altered as well.  Any changes to these other sources of income will put more of the burden on your personal savings, so monitor them closely.

8)    Has mine or my spouse’s health changed significantly? At some point, the desire to live close to the beach might give way to the desire to live close to a good medical facility.  As you age, investigate assisted living areas and medical facilities in your area.  You might eventually need to sell your home to move into a facility or even move to another state if you want to be closer to friends or family that will be involved in your care.  Do as much of this planning as possible while you are still healthy so you can easily transition into the next phase.

9)    Is my estate plan up to date? Your estate plan should not be a static document.  As your life changes, your planning must change with it.  Getting married or divorced would likely significantly change how you want to distribute your property.  Likewise if there is a death in the family.  Each year you should review your documents, including your will, trust, and powers of attorney to make sure that they still reflect your wishes and still have the correct people taking charge if you were to die or become incapacitated.  Also, if you move to another state when you retire, meet with your attorney to make sure that your documents will be valid in your new state of residence.  Make revisions as necessary.

10) Have my insurance needs changed? Not surprisingly, your insurance needs will change over time.  It’s a good idea to periodically review your policies and make changes as necessary.   Is Medicare adequate or do you need additional coverage to fill certain health care gaps?  Do you anticipate that you or your spouse will need assistance with basic daily activities?  If so, you might want to consider a long-term care policy.  Does your pension go away when you die?  Will your death burden your heirs with a large estate tax bill?  If so, changes to your life insurance may be in order.

For a handy PDF of this document, visit the Resources page.

 

Can you count on Social Security and Medicare?

Can you count on Social Security and Medicare?

Every year, the Social Security Board of Trustees reports to Congress on the fiscal health of the Social Security program.  Not surprisingly, high unemployment and a wave of retiring baby boomers have put a heavy strain on the program.  Benefits being paid already exceed tax revenues collected and in their 2011 report, the board estimated that the program will only be able to pay promised benefits through 2036 (one year earlier than previously estimated).  At that point the Social Security trust fund will be exhausted and revenue from workers will only be able to pay about 75 percent of promised benefits.

As grim as that sounds, the problems with Medicare are worse.   Thanks to higher health care costs and lower payroll taxes, the Medicare Board of Trustees now expects the Medicare trust fund to run dry in 2024 (five years earlier than previously thought).  The difference between promised benefits and estimated funds available is roughly $37 trillion.

 

What does this mean for you?

In all likelihood, your taxes will be going up and your benefits will be going down.  Those close to (or in) retirement, will see fewer changes than those with a decade or more to go, but in my opinion, no one will be immune.  The problems are just too big.  If you’re in your sixties you will probably receive most of what was promised to you.  If you’re in your forties, you won’t be so lucky.  Plan accordingly.

 

Maximizing retirement: Time vs. Tasks

Maximizing retirement: Time vs. Tasks

In his wildly popular book The 4-Hour Workweek, Timothy Ferris told the story of Vilfredo Pareto, an economist who lived from 1848 to 1923.  Unless you’ve read that book, you’ve probably never heard of Pareto, but you’re probably familiar with his most famous economic theory, the “80/20 Principle.”  Also known as “Pareto’s Law,” it basically says that 80 percent of the outputs result from 20 percent of the inputs.  It can be applied almost anywhere.  80 percent of the people produce 20 percent of the wealth.  80 percent of the profits come from 20 percent of the customers.  Basically, 80 percent of the results flow from 20 percent of the effort.

How can we apply this to retirement?  After working a 9 to 5 job for the better part of forty years, there is a real temptation to measure your daily progress by hours spent as opposed to tasks completed.  If you don’t have a “full day” there is a latent guilt that is carried over from your days of trading time for money (I give my boss forty hours and he gives me a paycheck.).  To avoid that feeling many retirees fill their days with busywork.

If you’re going to have a meaningful retirement, you need to embrace the idea that your goal is not to have a busy day or a full day, but a day spent on things that produce results (e.g. meaning, fulfillment, purpose, fun, happiness).  In other words, don’t focus on time.  Focus on tasks.  Ask yourself, what part of your day is done simply to busy yourself and what part is actually going to get you closer to your goals and give you a sense of accomplishment and purpose.  If Pareto’s law holds true, you should be able to cut about 80 percent of the busywork from your retirement schedule and focus on the 20 percent of tasks that are actually worthwhile.  The payoff comes not only in the form of a more relaxing retirement, but a more meaningful one as well.

Maximizing retirement: Maintenance vs. Milestones

Maximizing retirement: Maintenance vs. Milestones

No matter what exciting plans you have for retirement, you will still have a good many maintenance type activities that pop up on your calendar every day or every week; things like sleeping, eating, paying bills, going to the doctor, getting groceries, mowing the yard, and cleaning the house.  While important, these things don’t really add much significance to your life.

To find meaning and significance, you will want to focus on milestones.  Those are the things that, when done, give you a sense of purpose and accomplishment.  Milestones tend to fall in areas like family, relationships, education, adventure, community, hobbies, travel, and health.  When reflecting on your life, the milestones will be the things that stick out.  They will be the things that you are most proud of.  The maintenance will just fade into the background.  Because of that, do everything you can to condense, consolidate, minimize, or outsource the maintenance so you can be free to spend more of each day focusing on milestones.

 

Maximizing retirement: Assets vs. Experiences

Maximizing retirement: Assets vs. Experiences

As you move toward retirement, consider the merits of building a life that is light on fixed assets and heavy on experiences.  When younger, most people want a bigger house to fit the kids and keep up with the Joneses.  They want to live in a great neighborhood with great schools. The same logic is used when purchasing cars.  Bigger and more expensive is better, safer, etc.

Unless you have enough money to fund both, retirement should be focused on the experience, not the asset.  The wisdom of age should have taught you that life isn’t all about who has the most square footage or the biggest car collection. Contrary to popular belief, he who dies with the most toys does not, indeed, win. In all likelihood, he who dies with the most toys is a bit of a jackass.  A life spent in dogged pursuit of rich experiences and meaningful relationships can be infinitely more rewarding than one spent focused on the acquisition of more stuff.