Strategies For A Smart Retirement
Everyone wants a long, healthy life. In thinking about the financial aspects of this challenge, the most popular question we face is, “How much can I spend without running out?”
It’s a great question. However, it is not straight forward. As my partner, Warren, likes to say, “If you tell me what day you’ll die, I can tell you exactly how much you can spend.”
As we age, things we spend money on shift. Having a high quality of life likely means having funds to pay for exercise and physical therapy. If mobility is impaired, you might need a driver, personal shopper or someone to cook. All is available, for a price.
Addressing a few key questions will help.
- What are the odds of living to a certain age?
- How will you counter inflation?
- How will you deal with an inevitable decline in the financial markets?
The average lifespan of a man or woman in the U.S. is about 77 years. However, if a husband and wife both celebrate age 65, average life expectancy increases to 84. Furthermore, one of the pair has a 50% chance of living beyond 90 and a 21% chance of living to 95. Those are averages. Half will live longer and half shorter. It is wise to plan for longer lifespans.
Inflation has averaged 3.5% to 4% per year over the last 50 years. However, as recently as 2022 it was 9%. This is challenging when operating on a fixed budget. Depending upon where you are in life, inflation impacts all people differently.
The last consideration has to do with the “sequence of risk,” the ebb and flow of financial markets. About once every 25 years, the stock market drops about 60% over a two-year period. If you retire the month before a 60% decline, you need a solid plan to survive.
From 2000 – 2009 the stock market produced a zero return. If you spent too much, you wouldn’t survive long enough, and with enough assets, to come back out the other side to benefit from the strong market of the last fifteen years.
How do you position yourself to survive and thrive in retirement?
Stay in the workforce. It improves retirement savings and keeps you active. If you hate your job, find one you like. Once you’ve been out of the workforce 18 months, professional contacts move on and skillsets erode. If the purchasing power of your portfolio is damaged, it is difficult to return to the workforce to replenish it. Consider the retirement decision to be “one and done.”
Anticipate you will outlive the averages. Assume you run the math and anticipate you will no longer need your funds past age 85, and then you live to age 95. Devising a plan for this possibility starts before you retire.
Exercise your body and brain. You will age more gracefully and can continue working, if needed.
Have a balanced portfolio that serves multiple masters. Financial markets not only ebb and flow, occasionally, they bring become unhinged. Divide your portfolio in three parts: Liquidity, Cash Flow and Growth.
Hold six to twelve months of living expenses in money-market to insulate daily needs from the craziness of the world.
Fixed income assets such as CD’s or corporate or government bonds produce cash flow and return principal over the next five years.
Allocate stock market assets for where you want to be more than five years from now. This allows your portfolio to absorb short-term volatility of stocks while maintaining a long-term path for growth.
Over the last 73 years a portfolio of 60% stocks and 40% fixed income has produced returns of 9% per year. It also incurs lesser volatility.
Lastly, limit withdrawals to 3% to 4% of assets on an annual basis. A balanced portfolio allows a retiree to earn more than they spend in most markets and provides an opportunity to outperform taxes and inflation.
More importantly, when the next minus 60% tsunami occurs, you will have been disciplined enough with your distributions to allow your portfolio to heal. As it heals, it will recover its purchasing power and keep you in the game. If you implement this discipline, you will most likely die with more money than you retired with.