One of the most important aspects of your retirement plan is that it be flexible. You need to be able to handle those curve balls that life tosses out at you – especially if you expect to be on a fixed income in retirement. The way you deal with those unexpected surprises will have a big impact on how long your money lasts.
Your Conceptual Understanding of Money
There are just a couple of ways to view your money and investments. Either you are going to spend everything you have, or it’s going to pass to someone else.
So, the balance in your retirement account is either going to be an infinite source of income or you’re going to deplete it. The retirement planning challenge is to anticipate the forces that could decide this.
Best Guess Scenario vs. Best Case Scenario
At the beginning stages of retirement planning you need to make some assumptions about a bunch of different things. You might make assumptions about portfolio rates of return, how much money you’ll make, how much you’ll spend and what you’ll be able to contribute to savings and investments.
Now, things don’t always go the way you expect. So, while retirement planning is based on assumptions intended to deliver the best case scenario, the reality is that if you’ve done the upfront work diligently and thoughtfully, your best guess scenario may well achieve some or all of your goals.
Your plan just needs to consider the things that have a potential to take you off track.
Investment Returns and Market Volatility
A long-term perspective focused on growing capital necessarily skews an investment portfolio toward risky assets. Owning risky assets like stock mutual funds means your retirement account will likely experience periods of volatility.
Now, people rarely notice when volatility moves asset prices higher – even when those moves are outside of expected norms. But when volatility moves prices lower – especially outside of expectations – that gets people’s attention.
Changes in the prices of the assets you own in your retirement account are going to happen. Sometimes they will be modest. Sometimes they will be bold. Sometimes they will be positive and sometimes they will be negative.
Your plan should take this into consideration. It should also be durable. If you’re going to reach ambitious retirement spending goals, you’re going to have to deal with volatility…especially early on in the process.
In the context of retirement planning, durable does not mean permanent. As you reach specific milestones or interim financial goals, rebalancing the account or changing its asset mix may be very appropriate for you at different stages in your life.
So, your plan needs to have both consistency and flexibility.
Purchasing Power of the Dollar
The further away from retirement you are today the greater the likelihood that the everyday things you’re currently buying will be materially more expensive when you’re retired.
Inflation won’t stop the day you retire. It will continue to erode your purchasing power long into your golden years. So, your pre-retirement plan needs to take a post-retirement approach. Sacrificing growth for income in the absence of a plan to deal with inflation should be considered cautiously.
Should you Postpone Retirement?
Lots of Americans work into their 70s…and not all because they have to. Life expectancy is extending. So, it’s very possible for a person retiring at 65 to still be active and healthy at 85 or 90. Your retirement plan needs to take this into consideration.
At a certain point you could be faced with a situation where the equilibrium between the cost of your retirement lifestyle and the longevity of your retirement assets changes. How might you react to such a change?
At a certain point you may need to seek additional sources of income or the necessity of lowering spending. Whether you plan for this contingency before or after retirement will be somewhat dependent on the decisions you make now.
For help answering these types of questions, give us a call at (800) 235-8396.
