Broker Check

Focus on Retirement Planning



By:  James C. Denton, CFP®, Managing Partner

As one might expect, Retirement Planning is a topic we get asked about perhaps more than any other.  And asked about or not, it’s a subject ultimately near the top of just about any financial planner’s action list.  I often tell clients that ultimately all planning is retirement planning because, (1) it’s the one “need” that just about everyone has, and (2) it’s what is left to worry about after everything else (providing for income for survivors, paying off mortgages, educating kids, starting or sustaining a family business, etc.) is taken care of.  When the mortgage and college loans are paid off, what’s left is what you have available to fund your retirement income needs.

It is common for folks, usually around age 50 or so, to start to think seriously about retiring, and they are likely to approach their advisor with specifically that thought.  “It’s time to put together a retirement plan”.  My response usually goes something like this …

That’s something we can do for you and we’re probably as good at it as anyone.  I can put together a very nice plan – full color, lots of attractive graphs, give you info on all the things that typically come up in the retirement discussion (lifetime income, Medicare and long-term health care are the big three).  It probably will address estate planning issues and legacy goals, etc., etc., etc.  It will cost you somewhere in the neighborhood of $1,500 to $2,500, and that price will be very competitive with what you would pay any qualified practitioner.

It will also, for many anyway, be a substantial waste of money.  Because at the end of the day, all of that information, all of those beautiful charts, graphs and illustrations, all of those intimidating projections of future costs, expenses and taxes, and exciting projections of how much your investments will grow, can be summed up with a very succinct action plan …

Save more, spend less.

You see, it has not been uncommon either for a new client to come to me, or for one of my clients to go somewhere else for a “second opinion”, and then come to me with the finished product to see what I think.  My experience is that most of those plans I have seen are designed more to motivate than they are to educate.  They are designed to get you moving, and that’s fine as far as it goes but unfortunately the desired movement is to sell you something, whether a strategy or a product.  Reduced to their ultimate, actionable essentials, however, they can be summarized with that basic imperative.  Save more, spend less.

That’s right, exactly the same advice your dad probably gave you when you were 15 years old, the same advice most of you would give your kids when they graduate from college.  Guidance very rarely followed to be sure, but universally good advice nevertheless.  And it has the added attraction of being inexpensive.  Best of all, it won’t take funds that you probably need for that retirement goal and spend them on a coffee table artifact, which is where many of those pretty retirement plans end up.


To Plan or Not to Plan?  

A fancy, “formal”, detailed and expensive financial plan will not tell you much that’s important that you do not already know.
But that does not mean one should not plan for retirement.

As a matter of fact, nothing could be further from the truth.  So the remainder of this paper will be discussing the ways that just about anyone could and should be thinking about and planning for their own retirement.  Practical things which you can and should be doing yourself and others you will need help from your financial advisor.  But that fancy, bound formal (and expensive) plan is probably, in most cases, superfluous if not useless.   

Structure and Guidance:  Elsewhere on the website, we have provided a Retirement Planning Worksheet which will help you identify and provide structure for dealing with the things you need to be thinking about and starting to deal with.  It might be helpful to take a look at it now just to get the feel for the topics, subjects and issues to be contemplated, but don’t get too wrapped up in that right now.

The Event!

My experience is that just about everyone thinks about retirement as an “Event!” … a specific and finite point in time when you quit going to work and start enjoying the grandbabies or just putting your feet up.  This idea has worked its way into financial planning in a very insidious way.  We have been conditioned to think that we should save aggressively, both in terms of proportion of income, and also in asset selection, until “the Event!”  Start adding systematically to an earmarked account, perhaps, and invest as aggressively as you can and still sleep at night; so far so good. 

But when the magic date comes around, suddenly everything is going to change.  We expect to go from the accumulation phase to a distribution phase, and we expect that our risk tolerance and the way we invest will suddenly change.  You’ve heard the adage … “When you retire, you have to invest more safely; you can’t afford to take risks because you don’t have the time or income to replace a potential loss.”  The combined risk of investment itself, resulting in a future fixed and limited income, all in an ever-inflating cost environment, gives rise to the fear that we will have to live a very frugal lifestyle.  And the normally recommended action deriving from this (artificial, in my opinion) concern leads to exactly the results that are feared in the first place.  Largely a self-fulfilling prophecy.

Well in my opinion this paradigm is flawed, and does not properly inform an effective planning strategy. And it will not lead to effective retirement decision making or planning.  I acknowledge this is not a universally accepted idea, but it is an opinion I’ve held for a very long time, it is experience driven, and it has only become more firmly intrenched as I have watched the “Event!” come and go for a lot of clients.  The main reason:

Many of us will spend as much time in retirement as we did working, and that indefinite, but potentially long time period to plan for requires an informed and systematic approach to risk management that does not allow for an overly conservative approach.

The fact is, for many and perhaps most of us,

you can’t afford not to take some risk in your retirement portfolio.

By now you should be starting to recognize that retirement is not, or at least should not be approached as an Event!.  It is a process, and seeing it as such (better, approaching and dealing with it as such) should make it less traumatizing in preparation, and much more enjoyable in the execution.

The process started the day you started your first job, whether you recognized it then or not. It only began to come more into focus, and perhaps accelerated on the day you began to think in terms of an actual, let’s call it the “trigger” date.  And it (the process) will end the day you or your spouse if you’re fortunate enough to have one, whoever does so last, steps off of this mortal coil and into eternity (the “Final Event!”). 

A key point here … if you do have a spouse, this process thing takes on a much more important element because statistically, your combined life expectancy is perhaps significantly longer than either of you individually[1].

Here’s another important aside, a derivative of the combined life expectancy discussion.  The trigger date for the “Final Event!” ultimately is unknown to any of us, and for most, cannot be planned for with any degree of certainty.  Best way to put it – I often have people tell me their ultimate financial planning goal is “to die broke.  I want the check to the undertaker to bounce.”  The idea is that they want to fully enjoy their money, they have taken care of any and all responsibilities beyond their own well-being, and they don’t want to leave anything behind as to do so would be wasteful.  “I earned the money, I sacrificed to save it, and by golly, I’m gonna spend it before I go.”  “OK”, I say, “give me a date, and I can plan for that.  But if you live one day beyond that date, you’re on your own.”  That way goes cat food consumers.

Many people have learned, far too late, that living too long is far more devastating,
at least financially, than dying too soon.

 And after all, this is the reason we are planning for retirement in the first place; if we actually knew the date for the final event everything would be much less complex, and for some, perhaps completely unnecessary.

This leads to what, for me, is an absolute planning imperative:

Absent specific conflicting directions from you, if I am your financial advisor my assumption will be that either you or your spouse will live forever.

This is not nearly as ridiculous as it may sound initially, not nearly as difficult to plan for as you might expect, and ultimately simply a prudent planning objective.  Ultimately this concept and what it means in practice is a discussion topic, not manageable in this forum, but again not nearly as far-fetched as you might suppose[2].   

The Retirement Planning Worksheet:  O.K., let’s talk a bit about how to use the worksheet. With respect to the Event! itself as it informs the planning process:  There are two phases, “pre” and “post” trigger-date, and these two phases each have their own characteristics.  There are more ways in which they are alike, however, than they are different.  But there are a lot of things that need to be considered and tended to in the pre-phase.  That’s what the Planning Worksheet is all about.

You’re not going to think of everything and the worksheet should not be seen as comprehensive either.
Furthermore, you’re not going to get it all done and you don’t have to.

A lot of the procedural stuff will leak over into the post-period.   Necessary decisions will not get made (some, not even identified); decisions made will get changed, pre- and post-gold watch.  The point I’m getting to here is, it’s a process, and you must not allow the process to consume or overwhelm you. 

But you do need to identify, prioritize, and tackle the issues, and the worksheet will help get you started and keep you on track.

The worksheet is primarily for you.  As your advisor, I will ask for it for context and direction in my planning, guidance, etc. as I assist you through the process[3].  But that’s not its primary purpose.  So don’t let it intimidate you, don’t get hung up on the level of detail.  If not viewed in the proper context, it can seem overwhelming, but used properly it’s a living, dynamic guide which you might keep active for the rest of your days. 

There is a lot of stuff in the worksheet that may not apply or be helpful for you.  Ignore it.   Even delete it if you’re sure it will never apply. For compliance considerations, we do not give out much in editable form, we convert just about everything to .pdf format.  But we use the retirement worksheet in .docx format so that you can edit it; so that it’s useful for you.  Add stuff we missed.  Delete what doesn’t apply for you.  Don’t get hung up on, “What does this mean?”; if you have to ask that question, it probably doesn’t matter for you, but in any event, just move on to what does make sense.  And just like retirement, it’s not a “once and done” action, it’s an ongoing process.  Keep the worksheet as a roadmap, refer to it from time to time, and ignore the side roads, desert trails, rabbit holes, etc.  And keep it up to date.

Your first glance at the worksheet will probably reveal that there is much more to retirement planning than just the financial elements.  But the financial part is what you came to us for, and

The financial aspect is a life-long process as well
(from now until “The Final Event!”).

And here is what one might call a “paradigm shift”.  Remember we mentioned the conventional wisdom that someone in retirement must be more conservative than someone still in the accumulation phase?  I’ve alluded to this idea already, but let’s make it clear:

One thing that should not change, from pre- to post- trigger date,
is how you manage your investments.

Certainly, not in response to the act or fact of retirement itself.  In my opinion, portfolio management should be seamless, aside from whatever adjustments have to be made to provide for systematic income for living expenses post trigger.  Your portfolio will not look terribly different 18 months after The Event! than it did 18 months before, other than as objective and prudent adjustments to market events might dictate along the way; i.e., changes which probably would have occurred anyway.

From a financial planning perspective, there should be no “Event!”.  You are never going to sell all (or even much) of your stock portfolio and convert your vast or meager wealth to bonds (or whatever you perceive as a “safe” investment) because you’ve been taught that you “can’t afford to take risk”[4].  By the time one gets to retirement age, one life lesson we should have learned is that risk cannot be avoided.  Converting to a 100% “risk-free” portfolio would bring its own risks.  Extremes aside, most common efforts to “risk-proof” a portfolio simply serve to reduce growth opportunities without adding a lot in the way of safety. 

But risk can be managed, and the correct methodology for risk management is the same for a long-retired 99 year old with a 95 year old spouse as it is for a 50 year old just starting to think about The Event!.  That methodology is a well thought out asset allocation strategy that takes all of the big picture into account – your current situation and interim goals and obligations, your psychological and situational risk tolerance, and your long-term goals, your estate plan, your legacy goals, etc.  And that too is a dynamic, moving, on-going process. 

A 90-year-old probably will not own the same stocks in the same proportions as he did at 50, but he still should have more of a focus on long-term growth and value than on next month’s interest or dividend distributions.

So here’s the take away.  The future is here; it is now.  The process is ongoing.  Start planning.  Use the worksheet, and use us as well.  If there’s anything about what I’ve said here that doesn’t resonate, doesn’t make sense intuitively, we can talk about that first if it’s important to you.  And then we can start to discuss how your current portfolio diverges, if at all, from what a proper life-long investment strategy should look like for you.  But the key is …

  • Get started! Print out the worksheet, identify what the important issues are for you, and start thinking about planning for, addressing, dealing with them.
    • One example, just to clarify the concept. One question is “Where do you plan to retire?”  If you live in NJ and you don’t want to die there, start thinking about, and researching alternatives.  Doesn’t cost anything to think and talk about it and Google can be a pretty good (and free) tour guide at least in the early planning stages.
  • Save More; Spend Less. Your Dad was right, it’s the best advice I or anyone else can give you, and it didn’t cost you a dime.

[1] Joint life expectancy is an actuarial concept; reduced to its most simplistic basis, everyone has a life expectancy drawn from evaluation of very large statistical populations that each of us is a part of.  Family and personal health history further inform these evaluations when taken down to the individual level.  But beyond these macro to micro considerations, for each of us there is a risk of either going too soon because of an accident perhaps, or lasting too long because one just absolutely refuses to die.  When you combine two parties though, as a retirement plan for a husband and wife does, it is just as likely that one will defy the odds on the long side as it is that one of you will die early.  The prudent financial plan should, must, assume that one or both of you will live, as I suggest here, forever.

[2] Reduced to its most essential element what this means in practice is that your (and my) financial management goal, at least until your doctor gives you (the last survivor) a somewhat reliable expiration date, should be for you to maintain at least as much money in your investment accounts as you had the day of the “Event!”.  It’s a goal, it’s not a crisis if you fall below at times, and certainly should not ever be seen as a guaranteed outcome in any respect, but it’s a prudent strategic target and an excellent benchmark for ongoing in-progress review and analysis.

[3] When I said you do not need a coffee-table book, I didn’t say that you do not need a financial planner.  Neither should you expect that his services will come without costs.  Rather, from my perspective, the hope is that what I do for you will have value, and I and you both will feel good about the fees I charge and those you pay rather than me producing and charging you for something that I know, and ultimately you would too, was unnecessary or at best wouldn’t achieve meaningful results. My goal, my responsibility, is to do what I can to get you on track for, and then guide you through an enjoyable and financially stress-free retirement.

[4] At the time of this writing, and probably for a while into the future, bonds, as an investment category, have more inherent risk than most other conventional investment vehicles.  This is a separate topic (see “Focus on Bonds” elsewhere on this website) but important conceptually as you think through your asset allocation strategy.

The opinions expressed in this article are those of the author and may not reflect the views of LPL Financial or its affiliates.  The strategies proposed may not yield the expected results.  This material is not intended as financial advice for any individual;  You should contact your personal financial advisor before acting on anything in this article.