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.


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.

Seven signs it’s time to retire

Seven signs it’s time to retire

Deciding when to retire is not always easy.  Many people simply base the decision on their birthday, but there are a whole host of other factors that should weigh into your thinking as well.  Here are seven signs it’s time to retire:

1. Your bank account

When you retire, your portfolio takes over the job that the payroll department handled while you were working.  If you have to cut yourself a paycheck each month, it makes sense to be sure that your bank account is up to the task.  A common rule of thumb puts a sustainable withdrawal rate at about 4 percent.  Another way to look at that would be to shoot for retirement savings that are twenty-five times larger than your expected annual withdrawal.  If you are not quite there yet, it might make sense to work a little longer (or work part-time), save more, or make cuts to your anticipated spending during retirement.

2. Your bucket list

Before retiring, you should know the answer to three key questions: What do I want to do?  Where do I want to do it?  Who do I want to do it with?  Knowing answers to those questions will help give you purpose and a plan for how to spend your time.  If your key reason for retiring is to escape your job, don’t pull the trigger just yet.  Wait until you have a plan in place for meaningful pursuits.  Doing so will likely help you avoid a bad case of retirement “buyer’s remorse.”

3. Your health

If you are in excellent health and have longevity in your family, working a little longer may not significantly cut into your plans.  Not so if you or your spouse are in poor health.  In that instance, delaying retirement could mean your chances to do certain things are gone for good.  This is especially true if you are planning an active retirement.  Take an honest look at your health and life expectancy and weigh that into your decision about when to retire.

4. The markets

Investment returns during the first decade of retirement are extremely important.  Retire on the cusp of a bull market and your portfolio will likely build enough padding to withstand future downturns and withdrawals.  Retire and begin taking withdrawals at the beginning of a bear market, however, and those early losses will greatly increase your odds of running out of money.  Experts refer to this as sequence risk, but it could just as easily be referred to as luck.  No one has a crystal ball, but if the economy appears poised for a downturn, you might want to delay retirement (and withdrawals) until things rebound.  The same is true if your portfolio has significant losses in the years leading up to retirement.  In that case it might make sense to keep working until your investments have a chance to recover.

5. Health care benefits

Recent studies by Fidelity and others estimate that a sixty-five year old couple retiring today will need between $200,000 and $400,000 to cover health care costs during retirement.  That is in addition to what Medicare already covers.  Having a plan to cover those costs—whether by savings, private insurance, or a Medicare supplement policy—is an important consideration when deciding when to retire.

6. Social Security benefits

Retiring at sixty-two would mean a permanent reduction of almost 30 percent to your Social Security benefits compared to what they would be if you waited until your full retirement age.  Just like retiring early reduces benefits, retiring later increases them.  Those born after 1943 can expect an 8 percent increase for each year they wait to claim benefits after full retirement age.  This increase goes away at age seventy, so working until then will result in maximum benefits.

7. Your spouse

You would be surprised at the number of couples who are blindsided by differences over retirement dreams, plans, and expectations.  One wants to keep working while the other is ready to be done.  One wants to move to the beach and the other wants stay close to the kids.  Are you on the same page with your spouse when it comes to retirement?  Make sure you do your planning together so you can work through any differences early and enter retirement as a team.

As you can see, deciding when to retire is a complex decision with many moving parts.  By giving it the time and attention it deserves, you can help ensure that your retirement gets off on the right foot.

~ Joe

Be specific with retirement plans

Be specific with retirement plans

At the risk of sounding obvious, you have a much greater chance of accomplishing a goal if you know exactly what it is you want to do.  Someone committed to going to Harvard has a much greater chance of ending up there than does someone who just wants to go to college.  Someone committed to climbing Mount Everest is much more likely to reach the summit than someone who just wants to climb mountains.

How about you?  When it comes to retirement, how specific are your plans?  do you want to “save” or do you have a specific dollar amount in mind?  Do you want to “retire as soon as possible” or do you have a specific date in mind.  Do you want to “travel” or do you have a goal to visit five countries a year?  A decided person is a productive person.  Being specific allows you to aim at a target.  Not surprisingly, aiming at the target improves your chances of hitting it.