Retirement…[should] be thought of as the start of something not the end of something. As such there is a lot of work to do as far as how to spend your time, assess your finances (even if you have an advisor), become your own health and fitness advocate (and there’s probably more) and all of them are multi-faceted in their scope. Once you get to retirement it is an opportunity for many things if you have the right perspective. [Below are 8 brutal truths about retirement and how to make the most of each.]
The comments above and below are excerpts from an article by Roger Nusbaum (RandomRoger.com) which may have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!) to provide you with a faster & easier read. Register to receive our bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner)
1. You have no control over market returns
Over the last 15 years, the S&P 500 has averaged about 3% per year. Over the last ten years, it has averaged closer to 7% per year and the longer-term numbers are a little more favorable. You have some period of time that is relevant to you and there is no way to know how long that time frame will be or what the average return will be over that time. It is beyond your control. There is nothing to be gained by worrying about things beyond your control.
The point here is to understand you can’t expect to be up 10% per year if the market only gets 3% per year for the next five years or 15 years or whatever time frame. If the market does average 10% gains, then you might be pretty close. This can be thought of as a matter of luck as discussed below.
2. You can have control over savings rates, spending habits and can learn to overcome your biases
While the average annual result you will get is unknowable, investors who maintain an adequate savings rate, reasonable spending habits and the introspection to learn about their own biases and then overcome those biases have a very good chance of having enough when they need it. I think the spending aspect may actually be the hardest thing to overcome. An advisor can be a huge help for not succumbing to emotional biases even if not overcoming them.
Firsthand experience tells me that a lot of people have blind spots – where their spending is concerned, serious blind spots…What one person views as lavish extravagances, someone else might view as a staple that is essential to regular living. Again, this is about introspection.
3. Sequence of returns matters
This might as well be luck matters, which it does. You’ve got $800,000 in a 60/40 allocation in year one of retirement, you take your $32,000 and you get a 5% return, so at the start of year two you have $808,000. In that second year, the stock market goes down 30%, you take that same $32,000 out and the account is now down to $630,000. The third year the market is flat: Are you going to take the same $32,000?
There is a school of thought that in your first few years of retirement, you should have a very conservative asset allocation because of this type of scenario which of course happened (with different numbers) to people who retired in 2000 and then again for those who retired in 2007/2008. Folks who retired in year two or three of a now 7 ½ year bull market were luckier.
4. All that matters (investment-wise) is how much you end up with
You’re 60 years old and maybe you want to retire or maybe your hand is forced one way or another: How much do you have in relation to how much you think you need? The task here becomes building a withdrawal strategy based on what you have right now. Whether you outperformed, lagged, whatever performance-wise means very little – I would argue it means nothing. Whatever led you to have $800,000, $925,000, some other number has already happened. Your number right now, regardless of where it came from is your only reality.
5. A $10,000 part time job is like another $250,000 in your retirement portfolio
…The numbers are obviously a play on the 4% rule. I’ve referred to this idea in the past as relieving some of the burden from your portfolio. How much are you planning to take from your portfolio? What percentage does $10,000 earned reduce the needed withdrawal by? With some thought and planning this can be something very fun connected to your interests, like monetizing a hobby…
6. The best withdrawal strategy will probably include depleting accounts
If you have some combination of taxable accounts (like a trust), traditional IRAs and Roth IRAs and you are concerned about tax efficiency, then you need a strategy for where you pull money from first. One track to pursue is taking from your trust account first, as this type of withdrawal is not taxable; how you raise the cash to meet the withdrawal of course could trigger a net capital gain.
Taking money from the traditional IRA is taxable but the money grows tax-deferred so many people find it best to wait as long as possible before tapping that account (they go to this one when the trust runs out or the RMD kicks in). Continuing the thought, the Roth is taken from last because it grows tax-deferred with no RMD. There are countless variables and other valid approaches – consult with an advisor if you are not sure what is best for you.
In the $800,000 example above, if $150,000 is in a taxable account and the rest in an IRA, from a tax perspective, the best thing might be to take that $32,000 all from the taxable account and repeat until that account is depleted all the while the IRA hopefully continues to grow (tax-deferred). Depleting an account will be very uncomfortable, maybe so much so that you can’t do it, but from a numbers perspective you should be open to the idea. Now tie in the idea of $10,000 of income from a monetized hobby and the $150,000 taxable account might last 8-9 years instead of 5-6 years.
7. Staying fit will save you a fortune
We have all been influenced by things that people have said to us or that we’ve otherwise read. A couple that resonate with me related to health are that we are all genetically programmed to have a certain body shape and we are likely to have better luck with our health if we don’t deviate from that shape. The other one is that in our late 20s we begin to naturally lose muscle mass which can lead to a lot of problems later. I lift weights very regularly with the simple goal of staying ahead of that deflation.
Anything can happen to anyone at any time of course but for most people, making time to exercise is within their control. Aside from feeling better and being able to do more things later in life, if a fitness routine can stave off increased medical spending for some number of years then obviously you’re in better financial shape to weather other things like maybe a particularly rough bear market for equities or dealing with an unfortunate circumstance of needing to rewire your house and replace the roof at the same time.
8. Asset allocation
Having the right asset allocation is arguably also more important than whether or not you outperform the market. There are a couple of reasons for this. The first one has to do with riding out bouts of normal stock market volatility. Having every dollar exposed to equity market volatility is too much for most people. An allocation to fixed income and alternatives helps to address this. Beyond that is the fact that in any given year, some asset class will be the best performer and some asset class will be the worst performer and figuring which will be which is difficult to do (like with the bond market for the last few years). By owning the various asset classes, you have at least some exposure to whatever performs best in a given year which can help smooth out the ride. In 2016, gold is up about 25% versus up 5% for the S&P 500 after a stretch where gold lagged badly. This also pertains to how you allocate within asset classes. While that seems basic, staying in touch with the basics is pretty important.
…With the time horizon that more and more people will have at 60 or 65, retirement can really be thought of as the start of something not the end of something. As such there is a lot of work to do as far as how to spend your time, assess your finances (even if you have an advisor), become your own health and fitness advocate (and there’s probably more) and all of them are multi-faceted in their scope… Once you get to retirement it is an opportunity for many things if you have the right perspective.
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