retirement

Observations from the Brink of Retirement

A retirement income specialist shares three important lessons he's learned during his own financial and mental journey as he gets ready to dive into retirement. His personal insights could help guide your path as well.

Planning for my own retirement has been interesting, as my day job is teaching financial advisers about retirement planning. At this point the planning is done, and the end of my full-time employment is on the horizon.

Here are three things I’ve learned while going through my retirement planning process.

1. Planning is Important – Even If the Future Is Murky

I have found that the questions we ask people when building a retirement income plan are really hard to answer. What will you do in retirement? Where will you live? Will work be part of retirement? These are all questions that I have struggled with, and the answers keep changing. For me (and probably for most busy workers), it’s hard to figure a lot of this out until you are actually retired and have the time to give it enough attention.

One decision that does have to be addressed upfront is choosing a retirement date. This one has so much impact on retirement security that it needs to be considered carefully. At the same time, you may be looking forward to retirement life — I know I am. I look forward to joining my spouse, who has been in retirement for several years, trying new things, contributing to the world in a different way, and just having some unstructured time during the day to breathe.

I did what I would encourage everyone to do: Take your time, don’t make the decision in reaction to short-term circumstances, and carefully figure out the financials before making the decision to retire.

So, what do you do if you don’t know exactly know what you will do in retirement, but you need answers to these crucial questions to complete the planning process? What I’ve learned is that you don’t need the final answer to plan — you just need to start somewhere. If you are not sure, then make an educated guess.

A good place to start is to assume that your retirement lifestyle will cost the same as your life prior to retirement. One simple way to determine how much after-tax income you need to live is to just look at your take-home pay — for most this is what people live on. Similarly, choose a retirement date that makes sense to you, and then begin to plan. You may discover that the numbers don’t work and you may need adjustments to the plan or you have to make adjustments to changing circumstances.

Retirement income planning is rarely linear, there’s always going to be multiple adjustments along the way.

2. Risk Means Something Completely Different in Retirement

When you get to retirement, the risk that comes to the forefront is that your resources won’t last as long as your retirement does. This means that decisions need to be made with this concern at the forefront. One thing this means for most retirees is that while they need to invest with safety in mind, they still need to take some investment risk with their portfolio. (Much research looking at whether resources will last over a 30-year retirement period assumes at least a 50/50 stock/bond allocation.) At the same time, watching your portfolio go up and down in retirement when you no longer have a paycheck can be terrifying.

One way to cope is to use what is often called the flooring approach — in which safe investments or annuity products are used to build an income floor to pay basic expenses while other assets are invested more aggressively, and portfolio withdrawals are used to meet additional expenses. This is what I’m doing. I’m comfortable with risk in a portfolio but I also have no intention of worrying about paying bills at the end of the month.

The simple approach that I have used is building lifetime income with pensions, Social Security and annuity products, while maintaining a diversified portfolio primarily consisting of equities.

3. Own the Plan – With Both Sides of the Brain

Joe Jordan, who talks a lot about behavioral finance, has an important saying: A retirement income plan has to appeal to both sides of the brain. What he means is that it’s not only important that the numbers work, but the plan has to appeal to the emotional side of the brain as well. I’ve embraced this approach in my own planning — knowing that I need to feel good about the approach that I pick — I call this the sleep at night test.

Don’t underestimate this idea that it’s not just about numbers. Respect that your sense of security (which relates to happiness in retirement) is as important as the numbers. I also know enough about the numbers to know that there are a number of reasonable approaches that can work. Owning the plan also means having a better chance of sticking with it during retirement.

Conclusion

If there’s a unifying theme to all of this it’s that planning prior to retiring is critical, but it should also be personal. And it’s definitely a journey, not a destination. So here we go. I’m ready for phase one of retirement, and I look forward to reporting back as we see how it goes.

About the Author

David A Littell, JD, ChFC

Professor of Taxation, The American College of Financial Services

Dave Littell is the co-creator of the Retirement Income Certified Professional® (RICP®) program and a Professor of Taxation at The American College of Financial Services. He focuses on retirement income process, strategies and solutions to increase retirement security for consumers, business owners and their advisers through digestible retirement education.

Most Popular

8 Money Tips for Seniors Suffering from Inflation
Inflation

8 Money Tips for Seniors Suffering from Inflation

This year has been an especially tough one for seniors on fixed incomes. To stay on track, try these eight financial survival tips.
June 26, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022

Recommended

33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 23, 2022
10 Most Tax-Friendly States for Retirees
retirement

10 Most Tax-Friendly States for Retirees

Moving to a low-tax state in retirement can help make your retirement savings last longer.
June 23, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
June 23, 2022
Best Banks for Higher-Net-Worth Clients
wealth management

Best Banks for Higher-Net-Worth Clients

Those who can meet high minimum-balance requirements at these banks get abundant account freebies and extras ranging from financial advice to event ac…
June 23, 2022