If you look around, almost everything you see—from planets to people—is made to work as part of a system. Take the human body for example. It has the skeletal, nervous, circulatory, muscular, and digestive systems, just to name a few. All of those separate systems are brought together to form the incredibly complex human body. If your circulatory system quit working or your skeletal system suddenly disappeared, your body couldn’t function. Each part plays an important role.
What does this have to do with retirement? Quite a bit actually. The typical retirement has a lot of moving parts; things like your finances, health, family, and housing to name a few. Those parts work together in a complex system. If one of those areas isn’t functioning properly, it creates problems.
If your finances are a mess, will that impact your retirement? Absolutely. How about your health? Yes again. Ditto for things like your relationships with friends and family. Just like a broken transmission will affect how your car runs, problems with these areas will impact how your retirement runs. So here’s my point:
If you want your retirement to function properly, you need to be system thinker.
You need to put effort and thought into every key area of retirement if you want the overall system to function well. What are some of those key areas?
Money—If I ask you when you want to retire, your answer should be a dollar amount, not a year. Retirement is about independence, not simply age, and money is critical to independence. You should know exactly how much you need to save in order to fund the type of retirement you want. That means creating a detailed retirement budget and knowing how big your nest egg needs to be to spin off the needed cash. A common rule of thumb is that your savings should be twenty-five times larger than the income you want it to produce.
Pursuits—Money is important, but only as a facilitator. You need it, but you also need to have plans for it. I’ve written a lot about this idea in my books and elsewhere on the site, but it bears repeating: Before you retire, you should have very specific plans for what you want to do. In the near future I’ll be doing a post on creating the ultimate bucket list. Stay tuned. In the meantime, you can read this and this to get some ideas on making the most of your time.
Family and Friends—You need to be on the same page with your spouse before you retire. Here’s a handy checklist to guide your conversation. Also, don’t forget your kids. They’re probably grown and out on their own, but the plans you make will likely impact how often you’re able to see them (and your grandkids). The same is true of your friends. Keep that in mind.
Location—Are you planning on moving or staying put during retirement? That decision will affect almost every area of your life. Here’s an article with things to keep in mind.
Distribution Strategy—Transitioning from accumulation to distribution can be tricky. Taking too much, too soon from the wrong account or in the wrong markets could be the difference between retirement bliss and retirement blunder. For your system to function properly, you need a well thought out, sustainable distribution strategy.
Your health—Since 1950, the average retirement age has decreased by about five years and the average life expectancy has increased by more than a decade. If you want to take advantage of those extra years, it’s a good idea to take care of yourself. Nothing spoils your dreams faster than a heart attack.
Insurance—You’ll likely need hundreds of thousands of dollars (in addition to Medicare) to cover your health care costs during retirement. Make sure you have appropriate health insurance and long-term care insurance in place to help offset those costs.
Social Security—There are no “one-size-fits-all” answers when it comes to understanding Social Security benefits and how best to incorporate them into your overall retirement strategy. Work closely with your spouse, adviser, and local Social Security office to determine how best to claim your benefits. You can also pick up a copy of The Bell Lap (where I discuss the topic extensively) or visit the Start Here page where I’ll post ongoing articles about Social Security.
As you can see, all of these areas come together to form a complex system during your retirement years. Handle each area properly and the system will function well. Handle them poorly and you can expect problems.
After looking at the list, is there an area you need to focus on? Let me know if there’s anything I can do to help.
Photo by Joe Plocki. Used under Creative Commons License.
Time is money, as the old saying goes. If true, you may never be so wealthy (in time at least) as you are during retirement. Gone are the days of having to trade your most precious commodity for whatever the market would bear. More than ever, you are free to spend your days doing as you please. As part of the new “moneyed” elite, however, you will want to spend your time wisely. Otherwise you might find that another old saying applies: Easy come, easy go. What are the best ways to maximize your new time windfall?
Shake up your routine
Retirement is a major transition. That transition can be difficult and you’ll have a certain amount of inertia to overcome as you attempt to move from your normal daily routine into your new plans for retirement. To help jump start the process, it’s helpful to have big, new plans—like moving, traveling, or volunteering—that will force you to steer off the well-worn path you’ve become accustomed to and proactively pursue your new goals. If you don’t have specific new plans, it’s easy to fall into a routine that doesn’t look much different from your working years, save for sleeping in a little bit and having more time to run errands.
More than ever, retirement is a time to throw caution to the wind. As Mark Twain said, “Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
If you’re going to shake up your routine and head off in a new direction, there will be certain activities and commitments that are no longer relevant to your plans. Just as it’s important to make a “To-do” list to keep track of things you need to get done, it’s important to make a “Stop doing” list as you transition into retirement in order to free more of your time to focus on new pursuits. Prior to retiring, make a detailed list of all of your commitments and responsibilities. Go through each one and decide which you plan on continuing into retirement and which need to be stopped or handed off to someone else. Once finished, your schedule will be much less cluttered and you will be able to use your time more efficiently.
In addition to simplifying your schedule, simplify your investment accounts. The average person changes jobs several times over the years. That could mean multiple retirement plans at former employers as well as a number of IRAs and other investment accounts. This account proliferation makes monitoring your investments more time consuming and drawing income from them during retirement much more complicated. If you have multiple 401(k)s, roll them into an IRA. If you have multiple IRAs, consolidate them into one. Doing so will help to reduce fees, simplify your distribution strategy, make your investments easier to monitor, and free up more of your time to focus on other priorities.
Focus on milestones, not maintenance
No matter how effective you are at streamlining your schedule, 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, 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 (if financially able) outsource the maintenance so you can be free to spend more of each day focusing on milestones.
As you can see, by effectively managing your time in retirement you can make the most out of what will surely be one of the most fulfilling and rewarding periods of your life.
I originally published this article at www.fpanet.org.
Your retirement planning should not be done in a vacuum. If you are married, you should definitely include your spouse in the process. You would be surprised at the number of couples who are blindsided by differences over retirement dreams, plans, and expectations. It is no wonder that the rate of divorce among couples fifty-five and older is greater than the general population. Below are ten questions to ask your spouse to make sure you are on the same page and to bring your plans into better focus.
1) Where do you want to live? One of the most basic questions you will need to answer is where you want to live. Do you want to stay put or move to another house, state, or country? As you ponder this question, think about the types of things you plan on doing during retirement, your financial circumstances, state tax rates, climate, available medical facilities, and desired proximity to family and friends. Moving is a big decision with lots of moving parts. The more you have discussed your options the better off you’ll be.
2) What do you want to do? Think about what your ideal day in retirement will look like. List out your top three priorities and ask your spouse to do the same. If your top priority is lounging at the beach and your spouse’s is snow skiing, you’ve got some work to do. Ideally, if you have some time to go before retirement, you should spend your vacation time doing some of the things that each of you are dreaming about. Have fun, but use those trips to plan, discuss, test, evaluate, and yes, maybe even compromise.
3) Who do you want to do it with? Too often we take family and friends for granted. If you’ve lived in the same town for thirty years and all your kids and grandkids are within driving distance, pulling up stakes and moving to Tahiti can be a bit of a shock. It takes time to settle into a new place and cultivate meaningful friendships. Consider your answer to question one above. If you plan on moving, have you already begun to visit that place and get plugged into the community? Do you know other people who are planning on making the same move? How often will family be able to visit? Thinking through this issue and handling the move properly can help avoid any potential loneliness or regret.
4) How much will it cost? As you can probably tell by now, your answer to any one of these questions is heavily dependent on your answers to the others. This is certainly true with question four. Too often people make the mistake of retiring based on their birthday instead of their bank account. Think through your answers to the above questions and begin crafting a retirement budget. How much money you will need in retirement is a function of what you plan on doing and where you plan on doing it. Make sure that the plans you are making with your spouse are compatible with your financial resources. If not, what does that mean? Do you need to change your plans? Work longer? Have a phased retirement?
5) Where will the money come from? Your retirement income will likely come from several different sources, such as personal savings, Social Security, and possibly a pension. How you tap those accounts and when you claim benefits like Social Security can greatly impact how long your money lasts and what benefits your spouse may be entitled to if you die. It’s usually a good idea to meet with a professional adviser to make sure your distribution plan is sustainable and you are maximizing other income and benefits.
6) Assuming the money is there, when do you want to retire? Some people can’t wait to leave their working years behind. Others derive a lot of meaning and satisfaction from work and plan on continuing at it as long as they are physically and mentally able. If you tend more towards the former and your spouse the latter (or vice versa), you can see how conflict could arise. This is especially true if the job in question and the ultimate retirement destination are time zones apart.
7) How healthy are you? It will come as no surprise that health care and long-term care are major expenses and considerations during retirement. Talk with your spouse about how healthy and physically fit each of you are and how that will impact where you can live or what you can do. Discuss family history and life expectancy and how that might impact not only retirement plans, but also decisions like life insurance and Social Security benefits. This isn’t necessarily a fun topic to discuss, but it is important.
8) What concerns or fears do you have about retirement? Retirement is a major transition, and many of us aren’t wired to handle change well. Are there worries about money, moving, leaving a meaningful job, being further away from family, or other transitional issues? Discussing each of your fears and concerns and taking steps to alleviate them can go a long way toward easing the move into retirement.
9) Is there anything you absolutely want to do before you die? The regrets of our youth are typically based on things we’ve done while regrets later in life revolve around things we’ve failed to do. Is there anything that either you or your spouse wants to do, see, or accomplish before you die? Make a list and be as intentional as possible, so you can both spend your remaining years in pursuits that bring meaning and satisfaction.
10) Are your answers to the above questions compatible? How did you do? Did both you and your spouse have similar answers to the above questions or were there major differences? If it’s the latter, what can you do to reconcile your planning? The sooner you iron out differences the sooner you will be able to put your plan in place and move into one of the most meaningful and rewarding periods of life.
For a handy PDF of this document, visit the Toolkit page.
Ask a thousand different people what retirement is to them and you will get a thousand different answers. Many associate retirement with a particular age (sixty-five) or work status (not working). Many define it with certain activities (travel). In reality, all those things can be used to describe certain individual’s retirements, but they don’t define retirement.
Retirement is about control
I define retirement with one word: control. Think about it. When people talk about retirement, what do they usually say? “When I retire, I’m going to…” Retirement is a transition from doing what you have to do to doing what you want to do. Age and work status really have nothing to do with it. There are plenty of people who make it big early in life and decide to quit working. Likewise, there are people in their seventies and eighties who are still mentally sharp and derive a great deal of meaning and pleasure from their jobs. In this scenario, the person working is just as retired as the person not working. Work is optional. It is a personal preference. It has little or nothing to do with an arbitrary date set by a government social insurance program.
Retirement, therefore, is all about control. Don’t think of life as a timeline where youth equals zero to twenty, working years equal twenty to sixty-five, and retirement equals sixty-five plus. Instead, think of life as a pie chart that is divided into time you control and time controlled by others. The goal is to gradually shrink the piece of the pie that is controlled by others. The smaller that becomes, the closer you are to retirement.
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.
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.