A solid retirement financial plan cast in Jell-O is not an oxymoron. Don’t even think about the old “set it and forget it” mindset from the past. A solid financial plan suspended in Jell-O, that can quickly be modified, is a good thing.
I was on David Holland’s (CPA/CFP) PlanStronger TV show. He asked how things have changed for retirees’ finances over the last decade.
I shared what my generation experienced. As our children were leaving the nest, we realized we were not ready to retire; it was time to get serious. We worked with financial planners to set savings and investment goals. We would be “set for life” and retire comfortably if we hit the “magic number” in our account by our retirement day.
What does “retire comfortably” mean? It means no longer needing to work to maintain a comfortable lifestyle, without having to constantly worry about money.
I explained to David we hit our magic number right before the Great Recession.
“We followed the plan and hit our targets. Ten years ago I was told I was set for life. We could live off the interest and enjoy our golden years like we were on a permanent vacation. Things worked out exactly as planned – for three years!
The world changed overnight. The bank bailouts radically dropped interest rates. Our income shrank by two-thirds; we could no longer meet our income targets. In a matter of days we went from “set for life” to genuine worry about how to make our life savings last. We had to regroup and start over.
Almost immediately many began dipping into their principal to help pay the bills. The rules changed and our solid-gold plan blew up.
No matter how many times a financial planner tells you everything is all right, if you stay with your current plan your money will last well beyond a normal life span; there is still a knot in the pit of your stomach.
What will they be saying ten years from now?”
I was embarrassed; I had raised my voice!
When I finished, David mentioned the need for a solid financial plan, suspended in Jell-O. Boy is he right! What a great analogy.
What changed?
When you are working you are trading your time for money. Building a retirement nest egg is building a time bank for the future. When you quit working you trade money for time. Hopefully your time bank will allow you to pay your bills for the rest of your life, worry-free.
We worked with financial planners building up our savings (time bank), constantly checking and making sure all was in order. Leaving your full time job to retire is a giant leap of faith. Retirees need to know they have “income certainty” before taking that final step.
Why is “income certainty” so important? Young people, trying to build their nest egg have the benefit of time and can take more risk. Retirees are no longer trying to get rich – but rather trying to avoid getting poor. Investors want their retirement nest egg to continue to grow with minimal risk.
While preservation of capital is your top priority, you need your nest egg safely producing your projected income for the rest of your life. You need that money to pay your bills, you are no longer working in your peak earning years.
When the bank bailouts came, I had 70% of my nest egg invested in Certificates of Deposit (CDs) averaging around 6% interest. Literally overnight, the banks called in my CDs. I did not lose a dime; the capital was in my brokerage account.
I was lucky. Many of my peers were heavily invested in the stock market. It was not funny when one friend remarked, “I just saw my 401(k) turn into a 201(k). He went back to work and is still working today.
I lost 2/3 of my guaranteed interest income, however the bills remained. To replace the same “income certainty” I would need three times the capital. My “set it and forget it” financial plan would no longer work. I had to do something different.
When you lose your “safe income certainty”, your “retire comfortably” goes right along with it – you begin to worry about money.
When the bank bailout bill was passed, the government said it was a one-time event; things would quickly return to normal. The opposite happened; more bank bailouts and interest rates continued to decline.
Today a three-year CD earns less than the current inflation rate; approximately 1.8%. A $1 million CD pays $18,000 in interest. The 2017 Federal Poverty Level for a family of two is $16,240. A decade ago that same $1 million would earn $60,000.
Most baby boomers and retirees were forced to make adjustments and take more risk. Today’s (high-risk) junk bonds are paying less than FDIC insured CD’s were a decade ago. The stock market is setting new records. When will the inevitable major correction finally arrive? Not having to constantly worry about money has been replaced with real fears that come to light every day.
Many people are genuinely worried about running out of money before they die. Remember the Allianz Life survey that indicated, “… 61% of Baby Boomers fear outliving their money in retirement more than death?”
You rethink a lot of things and establish priorities.
- You love your grandchildren and want to treat them all fairly;
however adding to the college fund of the younger ones is much more
challenging.
- Even though we could, maybe we don’t need to go on a cruise?
- Should we drive instead of fly?
- Maybe we don’t need to eat out quite so often.
Making the necessary changes
David explained it’s possible to build a solid financial plan suspended in Jell-O. It’s much more flexible than a plan cast in stone and requires a lot more monitoring. It’s not just retirees; every generation is finding it necessary to make major modifications in their retirement planning. You cannot afford to ignore today’s realities.
How is it different from what we have done in the past? It starts with a mindset – like it or not, retirees must become active money managers even when working with a competent financial planner. Throw out all the old formulas and historical projections; deal with the here and now.
There are no shortcuts or EASY buttons in the real world. It was easy to invest 70% into CDs and 30% into an S&P 500 fund and have no financial worries. It worked fine for my dad! A similar plan today looks like it’s from the dark ages.
Diversifying across asset classes and investment products is much more difficult; far beyond what many of us imagined a decade ago. Today it is necessary; you want your eggs spread in many different baskets.
A solid retirement financial plan requires safety, enough yield (hopefully) to pay your bills, and keep your worries to a minimum. To build a solid plan investors need to be fully educated on the markets and realities. Don’t be afraid to get professional help, you must get it right!
Start with minimum risk income
Investments providing “safe income certainty” still exist. The current low yields require a lot more investment capital and bring inflation risk.
Moving to plan B presents many challenges. You must make up for the income loss wherever you can. Most quickly learned their new financial plan will not safely produce the income it did a decade ago. Many returned to the work force to close part of the gap.
The balancing act between yield and risk is a constant trade-off.
- How much risk can you afford to take? Bonds with higher interest rates come with higher default risk.
- Bond funds are considered very risky if investors tried to cash out in a hurry.
- Long-term bonds and CDs offer higher rates. Will the current yield keep up with inflation?
- How much capital can you risk in the stock market that currently sits at an all time high?
What happens if going back to work, and revising your plan doesn’t produce the necessary income? Many are drawing down from their principle to make up the remaining shortfall. While the projections may show your money will last well past a normal life span, worry still creeps in.
Cut your expenses
Downsizing is good. Many friends have downsized from the big house where they raised their family. They are all glad they did. The amount of money saved on real estate taxes and upkeep for unused bedrooms (which the kids might use one week a year) will pay for a hotel if necessary.
Having a solid plan designed to protect your capital, provide income and security in today’s world can still provide peace of mind. If things change you know how to adjust.
An up to date financial plan cast in Jell-O is far better than no plan at all. A little planning, sprinkled with some good common sense, and minimal financial worries can still provide for a doggone good retirement!
For more detailed information on how to get the job done, you can download my FREE report: 10 Easy Steps To The Ultimate Worry-Free Retirement Plan – by clicking HERE.
On The Lighter Side
Many thanks to our kind readers who send along notes each week. I want to pass along a couple of articles that were brought to my attention.
Right after I wrote about Calexit, I received this article about Nestle and other companies heading for the door. The exodus of businesses was greater than I realized
Last week I wrote about student loans. ValueWalk has some shocking statistics on how irresponsibly student loan money is being spent. Over half the students taking out loans did not calculate what their monthly payments will be, and they have no idea when they will be paid off.
Last Sunday we went to see our first Cub spring training game of the season. Now they are officially last year’s champions. Spring is in the air!
And finally…
Facebook presents it’s challenges and can get pretty ugly at times. Occasionally there are times some real gems seem to float to the top.
I really appreciated this one; it’s an age-old truth:
- A physician once said, “The best medicine for humans is love.” Someone asked, “What if it doesn’t work?” He smiled and said, “Increase the dose!”
Until next time…
This article was originally published on Dennis Miller’s free website Miller On The Money. Join today and receive his articles – Straight to your inbox for FREE! PLUS, when you join, you will receive Dennis’ Special Report – An Honest Persons Guide to Social Security – Absolutely FREE!
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