Retirement Solutions

The solution to that retirement equation is not math; it is control. Regardless of how many times we run the financial projections for potential retirement outcomes, the answers are always just educated guesses.

We are in the retirement solutions business; so we hate to be the bearer of bad news. But, we take our mission statement seriously to “help our clients build and preserve their family’s quality of life through the generations.” Our job is not to pretend that we can perform magic to sell financial products, but to help our clients develop and execute a realistic plan to achieve as much of their hoped for retirement success as is possible.

The only way we know of to turn the projections into reality is for the client to take control of the outcomes. While advisors and clients may be able to influence the personal rate of taxation and investment returns to a certain extent, they have no control over Medicare, Social Security payments or the rate of inflation. The only thing under the client’s absolute control is how much he or she spends. Rather than place unwarranted faith in computer calculations based on educated guesses, the focus should be on controlling current and future outlays and adapting to circumstances.

Most people would naturally like to continue to live at their present lifestyle level when they retire. However, when they find out how much invested capital it would take to support that level, they often suffer panic-filled “sticker shock”. For an oversimplified example, to obtain a spendable income of $75,000 after taxes, even after collecting Social Security, they might realistically need at least $1,500,000. Surveys have consistently told us that few pre-retirees have even a fraction of that amount.

Long Life Expectancy

When we add in the prospect of a long life expectancy coupled with continued inflation, the amount rises to even greater heights. Oddly, long life is now considered a risk called “longevity risk” instead of a blessing. It is the rising level of fear that a person might run out of money before he runs out of breath.

Due to the incredible number of variables in planning for the very long term, there is no such thing as a “magic number”. However, these advance calculations are helpful to give you an idea of the adjustments that may be necessary to meet your future needs.

Many people unrealistically assume that the needed funds will come from some employer or government provided benefits. That is becoming increasing less likely to ever happen. In the words of many retirement advisors it is now the YO-YO retirement plan – You’re On – Your Own.

One of the greatest fears that most people consider is the possibility of running out or money in their advanced years. Most people can do something to avoid that prospect, but it takes action – not just hope. Anyone with a sense of reality knows that means making some compromises. They also know that the sooner they start the greater the chance of making a meaningful difference.

In preparing for retirement, the method that we advocate with the highest probability of success is what we call the Glidepath to Retirement Success. This is a series of actions designed to help you cruise into a realistic retirement life. This is similar to an airplane gradually descending to the runway for a smooth landing. The alternative for many people may be more akin to a plane dropping suddenly out of the sky.

Glidepath to Success Action Plan:

Part I

• Track your current total after tax spending pattern (record carefully for 3 months and multiply by 4 and add in any semi-annual or annual expenses to get the annual figure).
• Divide your cash outlays into two classes: Committed and Discretionary.
• Determine your Margin of Error (That is how much you could easily cut from Discretionary spending if need be).
• Subtract the Margin of Error from the total spending.
• From that figure subtract the annual amount to be received from any defined benefit (pension) plans and/or fixed annuities.
• Multiply the remaining figure by 20 to get a wild guess at the amount of capital required to support that lifestyle after paying income taxes and accepting Social Security.
• Subtract that amount from the amount of invested capital you realistically expect to have if you continue what you are doing now.

If the result is a positive number congratulations! If not, you will have an idea of what it will take to get on your glidepath.

The key to the Glidepath to Retirement Success is accepting the extremely high probability that you will not be able to maintain your current standard of living when you retire. We often remind people that, in retirement, failure are simply not an option. The consequences are just too painful!

With that knowledge then you have two choices. You can continue to do nothing different and hope for the best. Or, you can take action by beginning a long-term plan to make sure your retirement cash will meet your retirement expenses.

Part II

• To have a GOOD retirement, Get Out Of Debt (it sucks the life out of your finances).
• Commit your family to reducing your spending (even if it requires radical action).
• Don’t try to “keep up with the Joneses.” (They may be on the path to retirement failure).
• Quit worrying about what other people think.
• Drive your cars for several years longer until they start needing serious repairs.
• Reduce your discretionary expenditures (e.g. entertainment, eating out, vacations and gifts).
• Consider downsizing your home if it is eating too much money.
• Take advantage of tax-deferred savings plans and forced savings plans at work, such as 401(k) plans, especially making sure to get the maximum employer matching.
• Don’t gamble; choose sound long-term, diversified investments and keep investing.

By gradually reducing your expenditures, getting out of debt, optimizing your taxes and steadily increasing your commitment to sound long-term investments, you will be gliding into a comfortable retirement. It may be at a reduced level from what you had previous dreamt, but you will be able to sleep. As you continue to build confidence in your plans you will gain a growing feeling of success that you are progressively achieving a worthy ideal.

Once you have determined how your glidepath will lead to a comfortable retirement, the next step is to consider your contingency plans. In the S-T-A-R-S System for Retirement Success^SM we always urge people to live for the best, but plan for the worst. That means doing the unpleasant work of considering various “what if” scenarios. Most people have a preferred retirement date in mind, say age 65. Unfortunately, a significant number have been forced into retirement well before achieving that date. In recent years many have been affected by company mergers, closures and layoffs. Others, especially business owners, are forced to leave be an extended illness or disability.