How Flexible is Your Retirement Plan?
Will the market go up or down? How will tax laws change? How will inflation affect me? What changes in spending can I expect at different stages of my life? How will my Social Security benefits or my pension benefits change? How will my own emotional state and capacity affect my needs in the future? How will advice be delivered and who will be helping me with these decisions over time? When, in what combination, and how severe will the changes be on all of these possibilities?
There is no crystal ball. And yet, you’ve got to plan for possibly 20 to 30 years of retirement income from the asset pool you have to maintain your lifestyle. It can be intimidating and very frightening as the stakes are high.
Some people get “conservative”. They pick fixed, and “guaranteed” strategies that leave little room for flexibility or change to give them a sense that everything is “set” or “easy” and “won’t change”.
Some people get “aggressive”. They try to move assets around willy nilly trying to get whatever performance edge they think can, or plan aggressive moves for short term tax benefits.
In our opinion, these are common, yet misguided strategies. What we try to think about and plan for comes down to one simple strategy: stay flexible.
Let us explain by going back to the original list of questions, and giving you some thoughts we have on each:
- Will the market go up or down? No one knows for sure. So, reframe the question- if you believe investing in the market can help you achieve favorable long-term investment returns, how can you establish a reserve, so you don’t have to touch your investments when it is down? In other words, do you have enough in other income streams or cash accounts that could buffer a down market for a desirable period of time?
- How will tax laws change? If all of your income is taxed in the same way, and is forced- such as a required minimum distribution, a pension, or an annuity, will the lack of flexibility to adjust your taxable income hurt you if rates or brackets go up? The more fixed your taxable income and assets are, generally the less control you have for tax planning.
- How will inflation affect me? We haven’t seen rampant inflation in the United States in many, many years. That doesn’t mean it can’t happen. And even without severe inflation, talk to someone who has been retired for 15 to 20 years and ask them about how much things cost compared to when they first retired. You’ll want to sit down- the conversation could take a while. How fixed is your income, and will it adjust enough, and be flexible enough for dramatic or subtle inflation?
- What changes in spending can you expect in your lifetime? Many people mistakenly think that their expenses will stay the same or go down. While this is possible, inflation alone can make a huge impact. We believe expenses change in retirement, but often do not go down. Someone who spent a lot on travel early on may spend more on health care later. Housing is often an issue. Many people forget to plan for large expenses. These could be unexpected- like foundation issues or things that could have been anticipated- like a worn-out car. Inflexible asset and tax planning can really be a detriment here.
- How will my Social Security and Pension change over time? If you are counting on these income streams to stay as they are you may be in for a shock. Social Security benefits, or how they are taxed can change easily and may in fact have to be changed in the future to sustain the system. Pensions are supposed to be “guaranteed”, however, pension benefits that are distressed can be modified or even eliminated. Consider your spending habits and a back-up plan.
- How will my emotional state and capacity issues factor into my planning? You may love to mess with your money and have done well doing it. It may have been easy to keep your cool in a recession if you were still employed. It’s a different ball game when you are retired. It’s a very different ball game when you need help due to a capacity issue.
- How will advice be delivered and who will be helping me with decisions over time? If you have a team of advisors- will they be around? What will fees look like in the future and will you be able to afford them for the complexity in your plan? If your planning is too complex, can the lay people around you (like your kids) help you maintain it? At some point, complexity is not worth the cost and risk of failure.
Finally, when, in what combination, and how severe will the changes be over time on all of these possibilities? And that is the key- a highly diverse, yet simple plan sounds like an oxymoron. It doesn’t have to be. It is possible a good retirement asset and income plan can be designed to provide buffers to many, if not all of these issues. It takes a lot of thinking about “what-if” scenarios to make sure one decision doesn’t back you into a corner on another issue. Monitoring and behavioral changes over time may also be critical.
Don’t let this intimidate you or freeze you in fear. The planning part can actually be enlightening and give you a sense of control that you may never have truly felt before.