Will Your Lifestyle Go Away in Retirement?
Peter Finch wrote a great article in the New York Times on November 29th about the possibility that people can spend more in early retirement because their expenses will go down as they get older. We think it was great because it caught the eye of multiple clients who then sent it to us to review. Some sent it as an FYI, some were clearly looking to go on a spending spree. If you don’t want to go back and read it, the gist was that as you age in retirement, your expenses go down naturally because you simply don’t have the energy or inclination to do as much as you did when you were in your early retirement years.
The article references three distinct stages- “Go-Go, Slow-Go, and No-Go”. The first is when you are young and healthy- we’ve always referred to it as the, “Yippee, I’m retired stage!” You are as young as you ever will be and have free time to use all that energy. You want to travel, fix up the home and blow money on your new grandkids. It’s all we can do with this stage to keep people from breaking the bank. In Slow-Go there is a definite slow down- but not always as much as you think. In our experience, people don’t drop below their traditional spending patterns, but we don’t have to argue as much with them about breaking the bank regularly. This also goes out the window if they have kids they are helping or if they are caring for aging parents- a relatively recent phenomena as retiree’s parents are living longer. If they move, remarry, or discover a charity or two they really want to support, this can also go out the window. As for No-Go, this can be the most expensive stage of all. Once a client can’t care for themselves, that care can get very expensive quickly. If they are married and one client is still in Go-Go stage and the other is in No-Go, that can be exceptionally expensive. The No-Go stage, like all others, in our opinion, will be redefined by the Baby Boomers. Many will live with debilitating health issues- whether ALS or Alzheimer’s- for long periods of time as their bodies will otherwise be healthy. Living with chronic issues becomes very expensive and is not covered by Medicare and health insurance supplements. Long Term Care Insurance can cover some of the expense, but rarely covers it all. Choice in care and quality of life depends heavily on the resources of the family or individual.
The article also doesn’t take into account a few other macro issues with retirement. As people retire earlier, they are projecting decades of spending, investment returns, tax policy and inflation. The chances of getting it exactly right at the beginning are slim to none in our minds. Simple differences in volatility patterns can change results dramatically. Spending patterns do change, even for the best laid plans, as unexpected surprises come up (like health events). Investment returns are not stable, and just because the markets have performed one way in the past doesn’t mean they will do so in the future as every successful woman with “Bag Lady Syndrome” reminds us regularly. Taxes are historically low right now, but with demographics changing and deficits rising, they very well may have to rise in the future. And inflation over the next 30 to 40 years is anyone’s guess. All of these things are not addressed in the article. It also doesn’t address that people are spending more time not only in the No-Go stage with health issues, but also in Go-Go than they have historically, as people are retiring earlier and longer.
Most of our clients want to make sure they have enough assets and income to sustain them throughout their lives. They have been good stewards and do not want the end of their lives, when they have the fewest options and the most vulnerability, to be at the mercy of others or a burden to others. In order to achieve this, we strongly recommend for most of our clients to stick within the budgets that are reasonable for them to maintain in early retirement assuming they will most likely continue the bottom line spending number of their healthier years in some way, shape or form. We advise that they monitor their spending closely throughout their retirement years. We feel like this gives them the most flexibility and what we call “Margin of Error”. Margin of Error assumes something will go wrong in 30 to 40 years or projections- we just don’t know what. By having it incorporated in the plan, we have room for mistakes. To us, it makes a lot of sense.
And for those who think, well, what if we lost out on some early fun and we end up with all this extra money at the end? We encourage our clients to form a great Plan B. This might be gifts to kids and grandkids late in life or making an impact on a cause that is near and dear to their heart. If the money is there, they still have great joy coming from it. If it is not, no harm is done.
We want to maximize the joy for all of our clients- but we also know they are paying us to help them reduce their risk of pain. It’s a fine line to walk since we do not have a crystal ball, but we continue create a unique strategy for each client based on their current and possible future needs.
The average age Americans are currently retiring is age 61. (Gallup)
Retirement Plan Contributions are Going Up!
By Kelly Hokanson, CFP®
In 2019, there is good news for accumulators- the contribution levels for 401ks and IRAs are going up. 401k limits (including Roth 401ks and 403(b)s) are going up for those under 50 to $19,000 per year. The “Catch Up” contribution for those over age 50 is in an additional $6,000 per year- so if you are over 50, this means you can contribute $25,000 to your retirement plan now.
IRAs are also going up. Limits for IRA contributions (including Roth IRAs) are $6,000 for 2019. With the “Catch Up”, those over age 50 can contribute $7,000 per year.
It’s important to note that you can make your IRA contributions for 2018 up until April 15th (don’t wait for the last minute- procrastination is ugly), but those 2018 contributions need to be for the lower limits.
Please make sure you reach out to your retirement plan provider to adjust those contributions, although you know we will nag you to do so.
I’ll be more enthusiastic about encouraging thinking outside the box when there’s evidence of any thinking going on inside it. ~ Terry Pratchett
Market Update: International Markets Take a Beating
11-30-18 YTD Dow 5.6%
11-30-18 YTD S&P 500 5.1%
11-30-18 YTD World EX US All Cap – 9.9%
11-30-18 YTD US Agg Bond – 1.8%
We have seen a lot more volatility in the market in the last couple months- and we don’t think it’s going to go away anytime soon. The international markets have continued to take the worst of the heat as trade policies are shifting and the drama of Brexit continues to develop. For accumulators, this volatility may work in their favor long term as they continue to invest. For folks who are in distribution mode, it continues to be important to have adequate liquidity on hand to deal with a time when they may no longer want to pull from their investment accounts. If declines continue, we will also be looking for tax planning opportunities as they may arise. As usual, our advice is to not panic. Volatility is a necessity for the market and is normal.