retirement

Be Honest With Yourself About Your Retirement Savings

You can’t make your money last unless you are truthful about how much you are going to spend.

Can you imagine going to the doctor with a broken bone — and not talking about it?

You gingerly sit on the exam table as the doc listens to your heart, takes some blood and pronounces you well. When the doctor leaves, you hobble out with your very broken bone. As the weeks and months go by, the break gets worse. You get some pain meds from the doctor but still don’t tell him about it. Eventually, infection sets in, you have to be rushed to the hospital, and….

If you had only been forthright from the start, the MD could have helped you. What does this have to do with retirement planning? Everything. In my own practice, I have seen investors who weren’t honest with themselves or with us, and their financial health suffered for it.

Forgotten expenses: One fictitious couple’s quandary

The situation always seems to unfold the same way: Ron and Rhonda Retiree have what they feel is a huge amount of money for retirement but have done no planning. They tell us they can live on X amount of their retirement portfolio each month. So we do a cash-flow analysis and estimate that the amount they want, let’s say around 5% annually, is sufficient for their needs.

But then it starts — the calls to the office for extra withdrawals. It seems they forgot to include some regular expenses — the long-delayed weekend jaunts or the maintenance on the boat or annual golf outings. They didn’t consider them a regular expense when we did the cash-flow analysis.

Now we have to add the additional expenses in to the calculation, and we’ve seen these forgotten extra expenses push the retirees’ cash flow need up to as much as 15% annually.

The other situation we see with retirees is the kitchen needs to be redone, or they need to buy a new car, or they want to give the kids some money for a down payment on a house. All of these are legitimate uses for their money — if they have enough, and if we had planned for it.

But they see this big pile of money and figure they can dip into it anytime they want, and it won’t impact the cash flow. They don’t see that they are trying to get the same cash flow as before out of a much smaller portfolio.

The result: A cash flow need estimated at 5% annually turns into a 7%, 10% even 15%. Burning through 5% a year was doable. But 15% is not realistic.

Be extra generous with your expense estimates

Well before retirement, investors should realistically calculate their retirement expenses. When we sit down and do this for investors, we factor in inflation, ask them about any large expenses they are planning and really dig deep to determine everything they will spend money on. Gifts, trips, parties. It all costs money. Then we estimate high. Always estimate expenses high.

We then look at their sources of retirement income. Pensions, Social Security, other retirement plans, investment portfolios, savings, businesses, part-time jobs — everything. Again, we apply inflation and project their income forward.

If you estimate expenses high and income low, you can mitigate against some unpleasant surprises. Always estimate income low. Luckily for many investors, their expenses will decline in the later years of retirement. They won’t be taking as many trips, they may sell off the summer house and generally spend less. But your expectations have to be realistic.

In the 1990s, I met with the dispatcher of a truck depot. He was going to retire and wanted someone to handle his rollover. This was back when Hillary Clinton’s investment miracle of turning $1,000 into almost $100,000 in futures was still fresh in everyone’s minds.

I sat down with the soon-to-be retired gentleman in his office and proceeded to do my normal due diligence. His Social Security was going to take care of only about a quarter of his expenses, so he needed to make up the rest through investments.

My inquiry continued: How much money do you have in the retirement plan? His answer: $5,000. How much do you have in IRAs? Nothing. How much do you have in savings? Oh, maybe a couple of hundred dollars. Checking? Nothing. CDs? Nothing. Insurance, annuities … anything? Nope, just the $5,000 in the retirement plan.

I asked him what he expected me to do for him. “Well… can you do the same for me that Hillary did?” he asked. True story. I felt terrible for the poor guy and suggested he look for another job or see if he could stay on at his current job.

It’s best to face the truth, even if it hurts

One couple came to us knowing that they were in a bad situation. But they were honest with us about it and it made all the difference in the world. We did a cash-flow analysis and they actually needed 15% of their investments per year. They knew their expenses were too high, but there was nothing they could do about it. There was no way we could safely get them 15% cash flow, so we had to be honest with them. All we could do was oversee the deterioration of their portfolio.

Each year, the portfolio shrank until it was gone. But because they were upfront with us and honest about their finances, we were able to extend the life of the portfolio, even though it was inevitable that they were going broke.

I’ve been in the business since 1986. Over the past 29 years, I’ve seen it all. If you want to make your money last in retirement, being honest with yourself, early and often, is the best policy. Retirement planning doesn’t start when you are 65. It starts when you are 40, 30, even 20 years old. There is a lot of work and planning that needs to go into a successful retirement. It starts years, even decades before you retire. And it starts with you being upfront with yourself and your financial planner, and having realistic expectations.

About the Author

John Riley, AIF

Chief Strategist, Cornerstone Investment Services

In 1999, John Riley established Cornerstone Investment Services to offer investors an alternative to Wall Street. He is unique among financial advisers for having passed the Series 86 and 87 exams to become a registered Research Analyst. Since breaking free of the crowd, John has been able to manage clients' money in a way that prepares them for the trends he sees in the markets and the surprises Wall Street misses.

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