An Agile Retirement Can Guarantee

Lasting Financial Security

 

We are continually bombarded with advice that the heavy lifting comes ahead of retirement (which is true) and then, on retirement day, we can exhale and let it ride.

Letting it ride, unfortunately, can lead to outright retirement disaster. Regrettably, that’s what happened to my aunt and uncle.

What I learned from their experience is that we need to embrace the mission of proactively managing our retirement plans starting on retirement day, and continuing for the rest of our life.

Our primary objective at Retirement Is All On You is to inspire future retirees to rethink the old ‘let it ride’ advice, and to reveal what they haven’t been told about retirement.

Until now.

I’ve used my aunt and uncle’s experience as a real world example of how even near perfect retirement planning and preparation can tragically become derailed during retirement.

In their case they encountered circumstances that many others experience, but their responses were the opposite of an agile retirement.

They stubbornly refused to adjust to their new realty.

They did not develop a revised plan to get them back on track.

Worse, they made a series of bad decisions, one after another, driven by reality avoidance, that dug their hole deeper.

Retirement is the worst time to adapt to new financial circumstances because a major rescue lever – increasing one’s income – is severely compromised or non-existent.

Retirement is a phase of financial life where we are often dependent on a pension (if we’re lucky enough to have one), social security, returns from investments, and withdraws from retirement savings.

Unfortunately, these sources are usually fixed.

Therefore, emphasis has to be placed on controlling and adjusting spending and asset management to accommodate new developments, since new income sources aren’t available to fill an unanticipated gap.

There’s little room to absorb mistakes and get back on track.

The harsh reality is that, in planning retirement, you’re fundamentally trying to finance a 30+ year vacation with 35-40 years of work.

Not any easy feat!

Adding to that, many changes and unexpected events later in life often have tremendous financial impact.

Long term illnesses and reductions in mobility, like my aunt experienced, can require major lifestyle changes and spending support that can have devastating financial implications.

Planning for our short and long-term financial futures, from our early 20s on, is necessarily based on a series of guesses regarding what our future will look like.

Will we have kids and, if so, how many? Will we be married, single or in a long-term relationship?

Where will we live? How much money will we earn? What will our basic needs be? What level of health will we enjoy? How much will college cost? How long will we live? How will the stock market perform?

Will our parents need our financial help? Might we be unable to work?

All of these unknowns make planning especially difficult because each factor can have a major impact on our finances. In compensating for the unknown, we have to make our best guesses and then add reasonable contingencies.

Certain events in our lives, especially those that have lasting financial impact, should trigger us to redevelop our retirement plans to reflect our new reality.

For instance, changing jobs to one that pays half the prior income requires a new plan.

Having one or more kids when our original plan called for none requires re-planning.

Getting divorced when your plan called for two incomes in one household dramatically changes your financial future.

Or a major health event, before or after retirement, can impact both your long term income AND expenses.

In my aunt and uncle’s case, there were two major events where they should have developed new plans to reflect significant, permanent changes in their reality.

The first was when they lost half of their investment principal in high-risk investments, and the second is when my aunt became a paraplegic.

Sadly, they made no adjustments for either, ignoring their new reality by keeping the same spending patterns established in much different and better times. This was despite having fewer assets and new financial burdens.

For instance, few ever anticipate the cost of a handicap accessible vehicle. They can run double the cost of a standard vehicle and, due to their complexities, their lifespan may be much shorter and repair costs higher.

The permanent need for assistance with day-to-day living, which is not covered by insurance, can pose another major cost.

Although her illness was unexpected, my aunt made several early decisions — like not adapting the house to accommodate her wheelchair, and giving up on a prosthesis that would allow her to walk with a crutch (even though her doctors believed she was fully capable) — that had the lasting outcome of complete dependency on my uncle.

From her perspective this was a safe bet because of her declining health and his relative youth, but reality showed it to be a losing bet with painful consequences.

My uncle engaged in his own expensive avoidance-of-reality by retaining a large cabin cruiser they could no longer use.

And the same case could be made for their southern winter house, although the reasoning that they retain it because he would move there after her death was a bit more understandable. But it was unfortunately tragically expensive nonetheless.

At all phases of life, our sound financial futures depend on reexamining our financial plans when unexpected life changes occur. The more quickly we align our financial plan to our new reality, the better we can limit the long-term damage.

When the changes are significant, it can also be valuable to seek outside counsel from a fee-only financial planner, and possibly an attorney.

In an elder care situation, when significant health issues are involved, gaining expert financial advice can provide return on investment many times over the initial cost, as navigating the complexities of Medicare, Medicaid, and asset preservation is not for amateurs.

Today, with lifespans continuing to increase, our retirements might last nearly as long as our careers.

Think about the implication of having to nurture your assets to cover several decades of living expenses with no job-related income. Success at this daunting pursuit requires an approach that’s radically different than the old ‘set it and forget it’ way of thinking.

I think the financial community overall, as well as employers, do a solid job of reminding us we need to prepare for our retirement.

And because we all know people who have reached that stage of life, it’s a tangible event that’s easy to relate to.

The fact that our job-related income will end on retirement day is also an event that’s so significant it causes us to consider the importance of ensuring we have enough money to maintain a certain lifestyle.

Despite these strong cues, not all take action, and not all, for various reasons, will or can prepare to the degree they’d like.

But retirement is not a concept that surprises many as a life event that demands long-term preparation.

The difficulty of ensuring a secure retirement gets back to the inherent challenges of making the right guesses in terms of how long you’ll live, how much cash you’ll need, what the economy will do, and what may happen healthwise.

Get these key assumptions wrong – and everyone will to a degree – and you may not enjoy the retirement you envisioned. If you’re way off, it can result in absolute disaster.

In rethinking how we might approach designing a retirement plan that has a higher prospect of success, we believe there are 16 key steps.

The first 8 – the retirement planning success drivers – may be at least partially familiar as they are focused on building a strong foundation in the pre-retirement phase.

It’s the next 8 steps – the retirement planning disaster drivers — that go beyond what many have considered as part of retirement planning.

These final 8 steps contain what most haven’t been told about retirement planning and success.

The disaster drivers must be avoided because, individually or collectively, they can destroy the best retirement planning and preparation, and thereby deny you of the secure retirement you worked so hard to build.

My aunt and uncle, had they avoided these disaster drivers, would have continued with a secure retirement despite the financial and health curve balls they experienced.

They would have maintained their happily ever after they worked towards and therefore deserved.

All retirement planning steps, and especially the post retirement period, demand a way of thinking that’s foreign to much of the current retirement literature: AGILITY.

Agility is defined as nimbleness, which is the ability to move quickly and easily.

In the realm of Your Agile Retirement, it’s the power to quickly respond to changing circumstances in order to ensure your secure retirement remains secure.

The opposite of agility is slowness and inflexibility. These can undermine your carefully prepared retirement, and force you into the very financial disaster your worked to avoid.

First, the foundation to an Agile Retirement is following the 8 Retirement Planning Success Drivers and avoiding the 8 Retirement Disaster Drivers.

Second is the commitment to methodically adjust your retirement plans at key points throughout your retirement:

1. A formal review at the end of your first year of retirement
2. A zero-based re-plan at the end of year three
3. A formal review and re-plan every 5 years thereafter
4. Evaluation if a plan adjustment is necessary based on major events

The First Formal Review: End of Year One

Here’s where the idea of Your Agile Retirement really begins to take life.

During your first year you’ve gathered real world data for what was previously a series of guesses, and these data can be critical to ensuring your retirement remains secure.

It’s likely that there will be expense areas you left out of your plan because you couldn’t anticipate them without having actually lived part of your retirement.

There also may be expenses you identified that cost more than anticipated, and these will likely be (at least partially) offset by those that cost less than expected.

The income your assets generate in this first year is also important.

If you still have a sizeable portion exposed to higher risk, and there’s a significant drop during the year, you may need to consider adjustments in your investment choices and projected withdraw rate.

If you’ve been using the same modeling tools during pre-retirement they can now be used with your revised investment balances.

Next, you’ll need to revisit your lifestyle assumptions.

Maybe your original plan called for traveling around the world continuously, and after the first year you’ve decided otherwise.

Conversely, maybe you planned for one two-week trip per year, but discovered how much you love to travel and would like to take four trips annually.

These potential adjustments need to be plugged into your retirement model so that you have a workable plan that you can continue to stick with.

 

Zero Based New Plan: End of Year Three

In the process executing a successful Agile Retirement, the three-year point is an incredibly important milestone.

After three full years of living your new life, you’ve gained significant experience on what your post-working years look like.

You also now have 36 months of solid data from which you can clearly see trends.

Areas of overspending, as well as areas you may have overestimated, will become clear.

Assumptions about investment income will also be tested and proved either accurate or off base.

With experience and information in hand, now’s the time to completely revisit every assumption you (and your significant other, if that applies) had about retirement.

I believe the best approach for the review is to use an incredibly powerful tool from the business world called Zero Based Budgeting (ZBB).

In setting new budgets and plans for home, business, or government, human nature often causes us to start with our current budget or spending level, and then add or subtract items to reflect changes since the last budget was set.

This causes us to cement our current patterns into our future, which might inflict permanent financial harm.

This can also be true with our retirement plans, as we likely invested significant sweat equity in designing and updating them over the decades ahead of retirement.

With ZBB, you tear up your current plan and, guided by the vision of the retirement you want to maintain, build a new plan from the first assumption and dollar on up. As though you were doing it for the very first time.

This allows you to think in a completely fresh way instead of making old habits a permanent part of your financial future.

Of course your three years worth of retirement data will provide a valuable reference point in understanding what your lifestyle is likely to cost.

After executing a ZBB exercise, there’s a good possibility that your new plan will be similar to your prior one, which is fine.

At least now you have revalidated your plan as still being ideal, and you’ll enjoy an additional measure of peace of mind from the process.

If your plan changes somewhat or significantly, however, it’s important to understand if adjustments in the deployment of your assets are necessary.

Also, if your new plan is anything beyond just a minor update, it’s important that you get an outside perspective to help validate the numbers and mechanics.

Assuming you’ve worked with a fee-only planner previously, run the new plan by them to ensure that you haven’t missed anything, and that your underlying external assumptions are still accurate.

The outcome of this ZBB re-plan is likely to produce the most realistic post-retirement plan that you’ve ever developed.

The chance to incorporate three years of experiences ensures that you are no longer seeing things idealistically, but instead with the perspective of life’s learning.

 

Major Checkpoint and Adjustment of all Assumptions: Every Five Years

At year three, your Zero Based Budget re-plan captured everything you’ve learned from your early years of retirement, and leveraged it to make the most realistic plan you’ve had up to that point.

Therefore your first five-year review should be a relative non-event, but it’s still a good time to make potential tweaks as you’ll have an additional two years of real-life data.

Future five-year plan updates will also likely be minor unless major changes occurred in your life.

At each five-year point it’s also important to review your estate plan, powers of attorney, health directives, and related documents to determine if any changes are necessary.

Typical events that would make an update beneficial include: the death of named beneficiaries or those who have estate responsibilities; the addition or removal of certain assets from your plan if there’s been acquisitions or divestitures; and any changes in who gets what.

While many file away their wills or trusts and don’t think about them until tragedy strikes, it’s important to conduct a periodic review.

The primary objectives of a valid will or trust is to make sure assets are distributed according to your wishes, that transfers occur smoothly, and that there are no delays caused by court or legal challenges by loved ones.

The best way to ensure these objectives are met is to keep your estate-related documents up-to-date.

 

Event-Driven Plan Adjustments

Major events in retirement can have a big impact on your retirement plan.

Life can throw curve balls, and those may happen with greater impact and frequency in retirement. Many of these events have serious financial implications for both the short and longer term.

And not all events have a negative impact on your finances.

For instance, deciding to move to a lower cost home or region, or deciding to curtail an activity that represented a major spending area, like world travel, can improve your financial picture.

But the ones that can really cause economic tragedy are negative events.

A new health problem that spikes medical and related bills, or the death of a spouse that results in a stream of income disappearing, are just two such examples.

When tragedy strikes, it’s easy to overlook the financial implications as you battle to resolve the problem or emotionally adjust to the new reality.

Delay in taking action, however, can make the financial aspect worse than if immediate action were taken to quickly control the damage.

Some confuse making adjustments with an admission that their situation won’t improve, or that they’re ‘jinxing’ themselves by acceptance.

But the good news is that if things improve, spending controls and other adjustments can be quickly reversed.

And if things don’t improve, at least you’re not digging a deeper financial hole in addition to the emotional toll of the event.

One of the greatest attributes of human nature is the ability to adapt to new circumstances, both positive and negative.

The faster you act, the better chance you have of restoring the peace of mind you deserve.

 

⇒Next: 8 Retirement Planning Disaster Drivers