Simplifying Retirement Income Planning
Simplifying Retirement Income Planning (and eliminating: “so what’s the catch?” )
Planning for one’s retirement is not nearly as complicated and confusing as you have been led to believe. You just need to understand how to overcome the “catch,” as in, “so what’s the catch?”
Yes, we’ve all been told, if not instructed, that planning for one’s retirement years is a treacherous and dangerous endeavor. You’ve seen the endless ads on TV depicting such grave worry about retirement, you’ve heard the baseless and nervous chatter at social gatherings, and there’s that “so-serious” tone in the advisor’s voice as he plays upon your confusion. Indeed, this must be complicated, right?
The fact is, planning one’s retirement income gets difficult when we refuse to face facts. We mess things up for ourselves; we get in our own way. We become “the catch” in our personal retirement planning.
Here’s what I mean—
After a detailed explanation and discussion of retirement choices, I frequently will get the response, “Wow, that sounds too good to be true…what’s the catch?”
The “catch” is YOU! We are driven to work against ourselves due to our own genetic flaws—our very “human-ness” prevents us from believing and doing things that we often know are truly in our best interest. Ever have that “gut-feeling” …but you ended up acting to the contrary? We self-sabotage.
As imperfect creatures, we are prone to making mistakes. When we are planning our retirement income, however, there is little room or time for errors. There are no “do-overs.” Mistakes in our 40’s, even 50’s, are a lot easier to overcome than mistakes in our 60’s because time becomes more critical and valuable. By the time we reach our 60’s, a lot of us have acquired various luxuries, but time is NEVER one of them.
So, let’s get retirement income planning right. Right now. And eliminate “the catch.” Ready?
STEP 1.) Develop an accurate and realistic accounting of ALL your monthly expenses. What does it cost to live your life each month? Be honest and don’t fudge your figures, you’ll only be fooling yourself! As part of this tally, allow for various discretionary expenses like birthdays, vacations, holidays, fun stuff.
Once you have final totals that you feel are realistic, add the two columns together and divide by 12. That resulting figure is what you need each month. I know this seems elementary, but you’d be surprised how hard this is for people to do and accept!
STEP 2.) Add up all your guaranteed income streams, sources like social security, pension money, fixed annuities, IRAs. Sources of money that are dependent on “market performance,” like stocks, mutual funds, variable annuities, and other “securities,” should not be included because you can’t count on it being there when you need it. That money is at market risk. It is difficult to plan a secure income with unsecured funds. (More on this subject in a minute)
STEP 3.) Now that you have accurate totals for both your monthly expenses and guaranteed income, subtract expenses from income. You will either have a net positive or negative. You just “assessed your needs.” You accomplished this by simple addition and subtraction.
If you like the number you just calculated, then congratulations, you’re well on your way to a stress-free retirement. If you were are not happy with your arithmetic, then we have some work to do
Retirement income planning based on “hope” is a fool’s errand. You must have guaranteed income to cover those guaranteed monthly expenses. How else can you realistically plan for the future? Hoping to be able to pay for known costs with unknown, or uncertain income is an error. Expecting income from assets subject to market risk can be a dangerous direction.
You must know how much is coming in each month to pay for how much is going out.
Many people are hoping to rely on anticipated stock market gains to pay the bills in retirement. Crazy? You bet. So how do you make do with your available assets to get out of that negative number you found in STEP 3? How can you generate a higher guaranteed income? How do we keep retirement income planning simple? What’s the “catch?”
Answer: Recognize that YOU are the “catch,” and follow the suggestions in STEP 4 below.
STEP 4.) Listen to your “better judgment.” How often do you hear that phrase, “against my better judgment…” which precedes some sad story of a bad decision made? You know what’s best for your circumstances. To generate a higher guaranteed income, try the following suggestions:
a.) Fight your natural greedy human instincts for “more.” You don’t need to gamble your retirement funds in a market risk environment. When you were younger and still working, you had the time to earn back your inevitable losses in the market. If you need those funds when the market is down your retirement will be directly impacted negatively. Stop chasing that extra few percents, that elusive number. Did you know that a compounded 3% increase every year—year in/year out, beats most market averages?
b.) Learn history. Those who forget the past are condemned to repeat it. We are cursed with selective and short-term memories. If you don’t remember what happened a few years ago (2008, 2009? Or 2001-2002?) you may have that experience that all over again. How were you affected then? Were you still working? How would retirement be different when the next crash comes?
c.) Develop an understanding of what shall be the purpose of that money–your retirement money? What do you want it to do for you? What is that money going to provide for you? How would things be different if you had 10% less? 20% less? 40% less?
d.) Understand the devastating effects of the “Fear of Missing Out.” We don’t want to miss out on the next “great opportunity,” do we? We’ll follow the herd. Against your better judgment, you know this crazy bull market cannot last, yet you remain heavily invested in the market because you don’t want to “miss out.” And when it finally does crash, you don’t want to miss out on the rebound. There comes a time when retirement money should never be at risk. Only have as much money in the market as you can afford to lose.
e.) Don’t listen to partial truths. This should be simple for most of us, but a lie repeated often and loud enough becomes someone’s “truth.” Develop fact-based decisions devoid of emotion. Seek unbiased sources of information. Ask questions. Demand answers that you understand.
f.) Recognize that “blind loyalty” has caused large individual and collective suffering throughout history. Do you trust your “trusted advisor enough to seek a 2nd opinion? If not, why not? Would it be too painful to realize the actual amount of fees you’ve paid over the years? Demand to know the fees and expenses you are being charged. Learn the true cost of your investments.
g.) Learn the “lingo.” Registered Investment Advisors (RIA) use terms such as dollar cost averaging and portfolio diversification. Make sure you understand how these terms apply to your retirement investments. Just imagine if your retirement funds could NEVER experience a loss? If you ALWAYS had a guaranteed gain no matter how the stock market performed? Could you handle absolute safety, security, dependability, and guarantees in your retirement income?
h.) Be aware of “normalcy bias.” Have you ever heard, “Oh, that could never happen?” Normalcy bias is our natural inclination to believe that something could not happen simply because it never has before. It’s crazy but true. We subconsciously rely on this built-in reaction when making decisions about our future retirement.
By recognizing our own weaknesses when it comes to decision-making, and understanding how we cause much of our own financial difficulty, we can make our retirement planning (and a lot of other things in life) a lot easier than we are led to believe.
If there’s a “catch,” make sure it’s not you.