Without clarity and confidence about our post-employment life, we may hang on, longer than necessary, in a state of fear, immobilized by the mysterious darkness of retirement beyond. But worse than that, we could be forced out of employment involuntarily before we have had time to lay the proper groundwork. Planning ahead offers us a soft landing. Otherwise it could be a hard landing.
In a soft landing, as in real-time aviation, there is a flight plan specifying where and when we want to put down. The soft-landing retirement is distinguished by two necessary and essential elements: confidence in realizing desired income and confidence in being able to reduce the risk of bad markets and inflation. For some of us there is also the ability to know we can leave a legacy to our children.
The two elements of confidence may seem self-evident, as in, “So what’s new and what action is called for here?”
Probably the greatest hurdle to overcome in transitioning from the employment world in which we save or accumulate our retirement kitties is to accept that it’s no longer about portfolio return. Many soon-to-be retirees continue to want to hold on to portfolio return as the key reward. No, now it’s about charting a course with the confidence we’ll enjoy our desired income without risking running out due to bad markets, unplanned expenses, or just living too long.
As I’ve frequently written, when we land in retirement, there’s a paradigm shift. It’s no longer about the amount of our retirement savings—the size of our “pile.” Rather it’s about how to maximize the income that the pile can generate in support of our goals and values.
Qualified planners have the sophisticated calculation tools to test under various adverse circumstances our ability to realize our desired income over typical retirement horizons of 30 years or more. The final reports from these tests can provide you and me the confidence we’ll need for retirement peace of mind.
These mind-numbing calculations do produce reports the average retiree can understand. They go well beyond the simple choice of a fixed withdrawal rate, common in much current retirement planning.
In order to compare all possible scenarios, we need to test when and how we claim our Social Security benefits, if and when we consider using bond ladders or annuities to boost our fixed income, and if and when we consider a reverse mortgage, either loan or line of credit.
The mystery of all of the retirement-landing options can be dispelled and our confidence in taking our first steps into retirement can be enhanced by running models for all of the variables we face: How much we have in retirement savings, our life expectancy, our tolerance for market volatility, how to structure distribution from our IRAs, and whether we want to leave anything to the next generation.
Common mistakes I see retirees make—mistakes that diminish either their long-term income or legacy—are continuing to chase return over income, claiming Social Security too soon, and avoiding serious consideration of annuities or reverse mortgages.
No one strategy suits everybody, any more than the classic rule-of-thumb strategy of the 4 percent withdrawal rate suits everybody. But we owe it to ourselves and our family to take a thorough look at all of possible retirement-income options available in order to make the best-informed choices for our long-term advantage.
Donald E. Askey, a fee-only financial adviser and planner with offices in Newburyport and Boston, can be reached at email@example.com.