The idea of retirement has changed over the years and means different things to different people. Retirement for some could be doing more of what they enjoy, i.e., volunteer work, gardening, golfing or traveling. It could also mean taking care of a grandchild or having the time to pursue interests such as going back to school or starting a business. As you plan for your retirement there are a few things that you and your financial advisor should take into consideration to ensure your plan is a success.
Retirement today is more complex than retirement was back when our parents or grandparents retired, specifically the length of retirement and the sources of retirement income. Let’s consider some of the facts about how retirement has evolved over the past 100 years. During the 1920’s the average retirement age was 65 but the average life expectancy in the United States was 53.6 years for men and
54.6 years for women, therefore retirement wasn’t a reality. Over time the average life expectancy has increased. By the 1970’s it was age 67.1 years for men and 74.7 years for women and today life expectancy stands at age 81.4 and 83.8 years respectively. Given the average retirement age today is someone’s early 60’s the length of retirement has increased from 0 years in the 1920’s to an average of 20-30 years today. In fact, some people are in retirement longer than they have worked. Due to these factors retirement income planning has become more critical.
Our firm typically begins the retirement income planning process when our clients are within 10 years of their planned retirement. We utilize financial planning software that incorporates our clients’ various sources of income (pensions, Social Security, employer funded retirement plans), expenses and other investments. Ultimately, the software uses an algorithm that runs our client’s specific scenario through a 1,000 different trials to come up with a probability of success, 99% being the best. Success is having money left at the end of their plan, which is age 92 for a male and 94 for a female. Actuarially speaking, there is a 25% chance of them living to those ages. Of course, we also take into account a client’s family history but would recommend going with the default age to plan conservatively.
When providing retirement income planning to our clients, we find that their initial goal is to make sure they can meet their current living expenses and also be able to do more of what they enjoy, which ultimately can increase their expenses. As our clients’ retirements evolve so do their goals. When talking with clients that have been retired for 5-10 years, they start thinking of other goals they would like to save for, such as college planning for their grandchildren or donating money to the charities they hold near and dear. It is important to re-evaluate these goals over time and to perform an annual check-up to determine if any adjustments need to be made to their investment plan and to confirm that they are on track to meet their stated goals.
In every meeting with our clients, we think it is important to get an update on how their current cash flow situation is and to determine what other goals they may have for their money. It used to be that
leaving money for heirs was an important part of one’s legacy planning but in today’s world more of our clients are wanting to gift to their heirs while they are alive, whether it be monetarily or through an experience like paying for a family trip that creates memories that last a lifetime. At the end of the day, we want to make sure we have taken into account all of our client’s goals, whether stated or unstated, as this gets to the heart of our firm’s mission statement of being holistic planners.