“It’s an open secret that the majority of Americans (as much as 70% of them, in fact) are not prepared for life when they no longer work. The real question is Why?”- Brian Swerdlow.
If you’re like most Americans, you probably have some fundamental concerns when it comes to retirement. You may be concerned that you will outlive any money you’ve managed to save. You could also have some uneasiness regarding the erosion of your life savings through inflation, deflation, or taxation. Finally, you might also be apprehensive when it comes to risk, worrying that even a tiny amount of exposure to the market’s ups and downs could wreak havoc on your portfolio.
Is conventional planning to blame for the retirement dilemma?
Many people don’t plan their financial lives well, yet that fact alone doesn’t account for the +-many alarming statistics surrounding American retirement. Instead, adherence to conventional financial planning may play a significant role. However, in the chaotic and unpredictable economy of the 21st Century, a new planning model may be required. Regardless of an individual’s economic status or level of investment sophistication, they must answer three core questions to formulate a successful retirement plan.
How much will I be able to spend when I no longer work?
- Unfortunately, conventional planning asks you to “ballpark” how much money you think you’ll need in retirement. A traditional financial planner asks you to stake your entire financial future on a guess that you may be making twenty or thirty years before you retire. Conventional planners assume that you and your household will spend anywhere from 70-85% of your pre-retirement income. This number is not derived from a customized analysis of your unique situation but historical averages. In reality, no one can guess how much they’ll need in retirement with any degree of accuracy.
- How many insurance or safe money products do I need? Creating the correct portfolio balance required to maintain one’s lifestyle in retirement might entail shifting more funds to safety-focused products such as life insurance or annuities. You will also want to understand your options regarding health insurance, auto and homeowners insurance, and other types of protection. In addition, an insurance review with your advisor could reveal policies that you may no longer need.
- What is my mindset when it comes to risk? While no one enjoys losing money at any stage of their financial life, risk is of particular concern to seniors. That said, every pre-retiree or retiree is different when it comes to risk tolerance. Some retirees may not want or need a retirement plan that skews too heavily toward the safety side. Others may be fearful that they have not saved enough to maintain their lifestyle and thus require higher returns.
Is there an alternative to conventional planning?
Once you’ve answered these three core questions, you will want to discuss your answers with a financial expert. Be aware, however, that even though you may trust your advisor to give you the soundest money advice available, if they base their recommendations on rules of thumb and not data, their advice may be inaccurate. On the other hand, if you are fortunate enough to find a financial advisor who uses an economics-based system to design and implement plans, you can remove all the guesswork inherent in rules of thumb.
An economics approach to retirement planning uses common sense, data, and specialized software to help craft the ideal retirement blueprint. Economics-driven planning generates more accurate and reasonable guidelines for spending, saving, insurance, and risk. Economics-based advice is based on the commonsense notion that most people don’t want to spend today and starve tomorrow, or vice-versa.
Summing it up: You may very well wind up spending 30 or 35 years in retirement. This possibility means that it is unwise to leave the planning process to chance. A wiser course of action is to partner with a holistic advisor who uses data-based strategic planning protocols to ensure optimum results.