How to Manage the Top 5 Risks to Your Retirement Plan
Congratulations! You’re retired. You worked hard, saved your money, invested wisely, spent smartly, and now you’ve reached a big milestone. No more commuting, no more office politics, no more presentations. Just you, your family, and your retirement plans. What could possibly go wrong?
The market goes up, the market goes down, the market goes up, the market goes down… Get the picture, there will always be volatility, business cycles, periods of fear, and periods of greed.
To manage, do these two simple things:
- Have a mental cushion. Understand that the market moves in cycles. Some are short-term, others long-term. If your plan is well built and followed, you can easily ride out short-term cycles and have a good opportunity to make it through long-term cycles. Be prepared for short-term declines in your portfolio values but keep an eye on the long-term.
- Have a liquidity cushion. Every retiree should have between 3 and 5 years of living expenses in some investment that is not directly dependent on the stock market – cash, money market, CDs, laddered bonds, very short-term bond ETFs or very short-term bond mutual funds1. This allows you to make it through a normal market cycle without touching your investment principal.
Over the long run, the cost of goods and services typically increase. The Federal Reserve has a mandate to maintain price stability – that means to minimize inflation. Since the early 1980’s inflation has been generally in check but continues to gradually erode purchasing power over time.
To manage, keep a portion of your investments focused on long-term growth. Shifting most of your money to conservative investments can provide more stability now but may not generate enough growth for adequate income later. Work to find a balance between preservation now and growth for income later.
Diminished Capacity / Fraud and Abuse
Though we all share the same inevitable outcome to our lives, each of us are on a unique path. For some, that means full mental cognition until the very end. For others, the mental decline can occur more quickly than the physical decline. Unchecked or unnoticed, diminished capacity can lead to safety issues (particularly for those living alone) or leave one vulnerable to fraud and abuse. Nothing can drain your accounts faster than a fraudster.
As is becoming the industry standard, our practice now requests that our ‘more experienced’ clients designate a Trusted Contact. Because of how we interact with our clients, we often identify diminished capacity before friends and family. When this happens, it is critical to have a trusted friend or family member to notify. There are various legal mechanisms available – powers of attorney, guardianships, etc. – but if no one recognizes the problem and begins the process, it will all be for naught. Financial advisors, CPAs, and attorneys are all comfortable working with families to address and manage these issues. Clear lines of communication are crucial to helping the family member in need.
Many years ago, I picked up a saying from a Marine Sergeant during a small group obstacle course training session: “A bad plan that is well executed will yield much better results than a good plan that is poorly executed.” I thought he was brilliant, but later learned he was just repeating the 100+ year-old words of Otto von Bismarck. Regardless of the source, the words still ring true today, even in the realm of financial and retirement planning. A bad plan, if followed, will work. An amazingly detailed 50-page financial plan with color charts and graphs, if not followed, is worthless.
The solution is to build a simple plan with measurable milestones (annual spending, rates of withdrawal), and stick with it. A deviation in one year (extra expenses) must result in an offsetting deviation in future years (less spending) or the plan will fail. Plan, monitor, adjust.
Supporting Adult Children / Grandchildren
This is the number one killer of retirement plans. Thomas Stanley, researcher and author of “The Millionaire Next Door,” refers to this practice as Economic Outpatient Care. In almost every case he uncovered in decades of research, the outcome of EOC was detrimental to both giver and recipient. The givers obviously had fewer assets upon which to live, while the recipients used the gifts to live above their own means. That is a recipe for double disaster.
Once your children or grandchildren are over the age of 18, you are no longer responsible for them financially or legally. Let them fly. If you are called to provide support past that age, make it specific and communicate the specificity. For example:
- We will pay for in-state undergraduate tuition for 4 years, 5 years if you maintain a B average.
- We will give each child $10k as a down payment on their first home purchase.
- We will fund each grandchild’s college savings account with $5k at birth and $1k on each birthday until they graduate high school.
Do not provide open-ended support for those not willing to work themselves. Do not provide annual gifts to those who are working but below their abilities – they will use your money as a crutch. Your gifts are not really helping!
While there are clearly more than 5 risks to your successful retirement, the above are the Big 5. Have a plan, monitor the plan, and adjust as needed. Minimize the noise from the short-term and keep the long-term success in mind.
If you have any questions or concerns about your retirement plan, we would be happy to assist.
The opinions voiced in this material are for general information only and are not intended to provide specific tax advice or recommendations for any individual.
- Bonds, ETFs and Mutual Funds carry different risks than Cash and CDs and may lose value.