Every retirement is unique. An individual’s situation – where they live, their health, their family, their finances, their goals – drives retirement. But, despite being so unique and individualized, fundamental tenants of retirement apply to almost everyone. In fact, the notion that we think we are so unique can be a hinderance to a financially successful retirement.
Perhaps this is best illustrated through the psychological occurrence when people go along with something because they believe everyone else is on board. For instance, when a speaker or teacher asks the room “Are there any questions?” usually no one raises their hand, even if they have questions. Many people don’t raise their hands because they think everyone else understands the topic and they don’t want to hold everyone back. People aren’t mind readers – we don’t have a good grasp of what others are thinking or feeling.
While we might feel our financial situation is unique, in many cases it’s not. When it comes to retirement, we all have a cash flow equation to figure out – what’s our expenses and income need?
Everyone also runs into retirement risks. While the magnitude of risks might be different for each person, the same risks generally apply: longevity, inflation, market risks, long-term care and health care risks.
Longevity is perhaps the most important retirement risk that needs addressed because it’s a big unknown. Longevity determines how long our cash flow problem will occur. Will it last one year or 35 years? It outweighs any other retirement risk we can run into.
When it comes to retirement planning, everyone needs three basic things.
1) Engagement. Engagement is really what retirement is all about. What are we going to do? Where will we find meaning? Will we spend time with family, golf courses, bass fish, cruise ships or paint?
People find meaning through engagement in retirement. Retirement is a period in your life when you should be happy, but without engagement you likely won’t be as happy. All of our finances and financial planning is a means to an end. The end being a happy and secure retirement and the means as the finances.
2) Flexibility. Be prepared for change. I often describe retirement income planning as like trying to hit a moving target in the wind. The wind being the risks and changes we’ll see during retirement.
Everyone will experience changes. Social Security will change, Medicare will change, taxes will change, inflation will occur and goals will vary. We don’t know which risk will occur, so we need to build flexibility into any plan. A retirement plan that expects to go in a straight line from Day 1 to the end will likely fail. This is why the 4 percent rule is such a bad retirement income plan – it doesn’t adjust for changes along the way.
3) Security. People need to feel secure that they’ll have the income they need in retirement. They can approach this in a few ways. Some people rely on guaranteed income sources like annuities, some bucket their money for different time horizons, and some distribute income based on systematic withdrawal approaches.
All of these strategies are designed to do two things: make money last for a lifetime and make the client feel like they have the money they need in retirement.
Not every client will feel the same level of security from each strategy. Some people want guaranteed income sources to somewhat understand how their money will be spent, and others are willing to take upside of investments in retirement to grow their wealth. But in the end, what people ultimately want is security. They want to feel confident their goals will be met, their income will be there when they need it and that they won’t run out of money.
While many of us might want to feel unique when it comes to retirement planning needs, that’s just not possible. You can boil retirement planning needs down to three things that apply to everyone – engagement, flexibility and security.