You think once you get to retirement its easy living, smooth sailing, you’ve made it, right? Don’t think so fast. There are a whole set of new factors trying to eat at your wealth. Here are a few you may have to deal with:
Eroding Factors in Retirement
There are six eroding factors that will specifically affect your retirement:
Duration of Retirement: How long do you anticipate your retirement lasting? You may retire at 55 or 73 and that makes a big difference. How long you plan on pulling from your assets impacts how much you can take and how much you need to save. Plus, people are living much longer so you may have to stretch your retirement dollars to age 100 or beyond.
Distribution Rate: A recent study by Merrill Lynch surveyed wealthy individuals and 20% of individuals did not know what distribution rate would enable them to sustain their wealth indefinitely. Nearly a quarter thought that a 10% distribution rate was reasonable and would last forever. Only about 1/6 had a more realistic distribution rate of 3% or lower. Most financial institutions site a 4% or lower safe withdrawal rate in order to have the best chance of sustaining your wealth. This really impacts how you invest both now and into retirement.
Children and Grandchildren: Having children and grandchildren is a wonderful thing. I have three children and they are the absolute joys of my life. As they get older, they get more expensive. Even when you enter your retirement years they can be a financial drain. It’s not that you won’t happily help them but you need to make that part of your financial model. How will you handle it should it happen?
A friend of mine had to adopt his daughter’s two young children just as he was entering retirement. That’s a significant financial commitment that is affecting his retirement. You don’t know what will happen with your children, grandchildren, or spouse. Stress test it with your financial model so that if it happens you won’t be financially devastated.
Legacy: Also, consider what you want to leave behind. What is your legacy? This is an area you really need to search inside yourself to figure out. Each person is different – money for the children, a charity, a cause, or nothing (spend it all). There’s no right answer, it’s just what you want to do. But it’s definitely part of your financial life.
Risk: While risk is an issue throughout your life, it becomes more pronounced when 1) you are older and approaching your retirement years, and 2) when you have a lot at risk. Our entire approach is about risk management for your entire financial life, no matter how old you are. From protecting your assets (which includes you), to your investments, to maintaining financial balance.
If you’ve done all that we’ve suggested to this point then you are probably good to go. However, you may need to look at tilting your investment style more conservatively, or reallocating to allow for more income. Or making sure your strategy has downside risk protection that allows you to be in equities for a longer period even well into retirement. Have uncorrelated buckets of money is critical as well.
For investments, one of your biggest risks is sequence of return risk. That’s the risk of your investments being caught in a downturn at a critical time when you need them most. For example, what happens if the market crashes when you are 67 and retired? What about when you are 70 or 75? This is where having a defined investment policy statement and buckets of “cash” will allow you to weather the storms you may encounter. See the section on a strong financial position later in this booklet.
Communication: This is a critical area that most people don’t even consider. Your loved ones should know where your most important financial information lies. Introduce whoever may be taking over your estate, not matter how small it may/may not be, to your financial advisor(s). Let them know your plans, wishes, goals for your assets. It seems a bit morbid for some people but it’s a critical conversation to have and to maintain as you get older. Communication plays a role in planning your legacy as well. It’s not enough to state your wishes out loud. You need to put them on paper and protect them by communicating your wishes through a will or a trust.
There are many other areas to consider but most people ignore these. If you need help designing your plan for retirement or just a second look, we’re happy to help. Jumpstart YOUR knowledge of all the major wealth eroding factors by downloading our free ebook today: