The financial headlines these days can induce a kind of vertigo. “Stock market soars!” “Stock market plummets!” “Inflation tapering off!” “Inflation heading higher!” The roller coaster ride for those trying to plan for a financially healthy retirement is enough to give us all a bad case of whiplash.
For that reason, we were drawn to this article we just read from Kiplinger. In it, Denver-based financial planner Erin Hadary provides some helpful perspective on preparing for retirement in an economic environment that is extremely uncertain and highly volatile. As you’ll see, however, Hadary leaves out the one tool we consider indispensable, especially in this economy, and that is an essential planning tool called a financial dashboard. We’ll say more a bit further on.
Danger: Choppy Economic Waters Ahead
For anyone who pays attention to financial news, Hadary’s opening lines in her Kiplinger article come as no surprise. “People considering retirement in the near future, as well as early retirees, will likely need to navigate some choppy waters during these times,” she writes. A slumping stock market, a slowing economy and a Federal Reserve that has signaled further increases in interest rates to combat inflation require retirees to make smart decisions to avoid jeopardizing a successful retirement.”
(We should note that, as this article is being written for the AgingOptions Blog, the markets are showing signs of resurgence – but how long that might last is anyone’s guess.)
Hadary continues, “That’s where a well-thought-out financial plan can help make a comfortable retirement possible – even during a tough economy. When speaking with recent retirees or people who are considering retiring soon, here are three actions I generally recommend to help them navigate this major life transition.”
Action Step #1: Examine Your Spending History.
“Many people don’t keep a household budget in the earning years of their career,” writes Hadary. “They also do not want to live on a strict budget in retirement.” The approach Hadary takes in his practice, she explains, is to add up all annual spending over the last three years to (as she puts it) “look at macrotrends in spending patterns.” She states that you can do this for yourself by reviewing credit card and bank statements to find spending averages, although we would point out that this strategy doesn’t necessarily take cash spending into account.
“The purpose of this exercise,” says Hadary, “is to see if this spending trend is sustainable for the next 30 years in retirement. A person or couple must be able to afford to live on their portfolio savings and guaranteed sources of income, such as Social Security benefits.”
In her Kiplinger article, Hadary also notes an expense many new retirees might overlook. “Most new retirees soon realize they need to fill their days with at least one major activity – and this usually costs money,” she says. “During the first two years of retirement, I’ve watched my clients spend large sums on home improvements, as well as things like international and domestic travel in a recreational vehicle. Certain hobbies, such as restoring a classic car, can easily run into the tens of thousands of dollars and stress the financial plan.”
If this exercise shows an unsustainable rate of spending, there can be what Hadary calls some easy fixes. “These can include cutting back on monthly automated subscription payments, increasing home and auto deductibles in exchange for lowering premiums on insurance policies, traveling during the off-seasons and taking on some home improvement projects instead of hiring professionals.” In more extreme cases, a retiree may save money by downsizing, or selling that extra car to save even more money.
Action Step #2: Build a Plan to Survive a Down Stock Market.
“Worry during uncertain times is normal,” Hadary acknowledges. “But those with a comprehensive financial plan should be able to ride it out without making costly errors.” Here again, we want to emphasize that a financial dashboard is perhaps the best hedge against worry that a person can have.
Hadary offers a few financial suggestions. First, she advises, retirees need to guard against selling investments at a loss based on fear of market turbulence. “Most financial advisers know someone who sold their stocks when the market dropped in March 2020,” she writes. “But markets quickly reversed course and set record highs for nearly the next two years. A person with millions in investments who sold their stocks and lost 20 percent of their value often locked in their losses, missing out on reaping the potential benefits of market gains down the road in the recovery.”
Hadary also goes into a strategy called a bond ladder, described in this Kiplinger article . We won’t share the details here, but suffice it to say that there are various approaches that an investor can take, accounting for his or her personal goals and appetite for risk. A professional fee-for-service financial planner, armed with a financial dashboard prepared just for you, can guide you into a strategy that makes the most sense.
Action Step #3: Think Ahead 20 to 30 Years – or Longer
“Many people in their 60s planning to retire with between $1.5 million and $5 million in investment assets may feel comfortable,” Hadary writes. “But they often don’t know if their money will last them at least two decades, possibly longer. By building a plan based on different statistical models, a retiree is able to define their sustainable withdrawal rate, including longevity risks.”
The reason for caution is clear: it’s based on longevity. The U.S. Census Bureau and the National Institute on Aging calculate that there are presently about 2 million Americans age 90 and older, a figure which will rise to 9 million by 2050. “This means new retirees will need enough money to live comfortably for a long time and may not be able to leave money to their heirs,” Hadary writes.
“Being intentional about a retirement income strategy is key to reducing emotional fears, because the spend-down phase of life is so very different than the mindset of accumulation,” the Kiplinger article concludes. “Tough times may be ahead. But with a mindful spending plan and a strategic retirement income plan that has been stress-tested using statistical modeling, retiring with confidence in a volatile market may still be possible.”
Rajiv’s Advice: A Financial Dashboard is Your Most Important Tool
While Hadary’s advice is sound, the real solution, says Rajiv Nagaich of AgingOptions, is to meet with a qualified fee-based financial planner to develop a financial dashboard. This sophisticated, personalized tool lets you see at a glance how your strategies for saving, spending, and investing will affect your future. It also allows you to look at the effect of different rates of inflation, taxation, and other factors that can drastically change your future financial health.
“With a financial dashboard,” says Rajiv, “you can run what-if scenarios and see what tomorrow might look like using different assumptions. If you really want to ‘stress-test’ your retirement planning, and make sure you achieve your goals, a financial dashboard is the only way to go.”
If you’re intrigued by this powerful concept, contact us at AgingOptions. We’ll happily refer you to a qualified planner who will work with you.
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(originally reported at www.kiplinger.com)