The Importance Of Financial Choice In Retirement Planning

by: Russ Thornton

I recently listened to a podcast where another financial advisor was being interviewed.

This advisor is based in the northwest area of the U.S. and based on everything discussed during the interview, he sounds like a qualified, sincere and caring advisor. And it appears he runs a successful business.

This advisor works primarily with clients who are already retired. Or very close to retirement.

When asked about what financial planning tools and techniques the advisor uses for his retired or close-to-retired clients, he made a couple of comments that really caught my attention.

First, he commented that with most of his clients already retired, he didn't see a lot of need for the financial planning software available for advisors to use with their clients.

I don't take issue with this comment, and as I mentioned in a recent article, I would agree that sometimes advisors get so enamored with the tools in their toolbox that they lose sight of helping their clients make the most of their lives.

This advisor went on to say that neither he nor his clients saw a lot of value in a 50-page financial planning report when all clients really wanted to know is whether they could retire or not.

I don't take issue with this either. Simple is better, and it shouldn't take 50 or even 15 pages to answer the client's most important question(s).

But here's where this advisor's perspective goes in the opposite direction of my own.

He said that when a client is a year out from retirement, there's really nothing to model. He goes on to say that it's really a function of calculating how much retirement income his clients can expect to have through various market cycles.

And here's the part that basically set my hair on fire. He said (my words, not his), "it's not like you have a lot of choice when you're a year out from retirement. You're either going to make it or you're not."

Now before I continue, let me be clear that this advisor is clearly doing what he thinks best for his clients. And while I may disagree, it doesn't mean he's wrong or that I'm right.

However, I hope that by sharing my perspective on this topic of financial choice leading up to and in retirement, it will be helpful to you or someone you know.

If you know me or have been following my writing for any length of time, you know how important the idea of choice is when working with my clients.

I never want you or anyone that I'm working with to feel as if they're a helpless passenger on a crazy roller coaster where they have no control over the speed or when it stops or starts.

Instead, one of the most important things I can do for the people I work with is to help them explore and understand ALL the financial and lifestyle choices they have and the trade-offs among them.

Revisiting our advisor above, while he thinks that clients who plan to retire in a year have no choice, I respectfully disagree. And I feel the same way about people who have already transitioned into retirement.

What a lousy feeling it must be to approach retirement and feel as if your future is set and there's nothing you can do but spend what the markets will allow. I can't even imagine.

Instead, what if leading up to retirement, you were to consider what I consider the big 3 categories of financial choice:

  1. Time
  2. Cash flow
  3. Risk

Let's say you're 64 years old and you plan to retire at 65, one year from now.

Well, what if you retired today instead?

If you retired a year sooner, it's pretty safe to assume you're retirement spending would be reduced, perhaps by a meaningful amount.

You'd have one less year of savings, one additional year of spending, and if you're eligible for a pension, that's one less year of eligible earnings that go toward calculating your pension benefit.

I'm stating the obvious here, but retiring sooner almost always means spending less in retirement.

And if retiring sooner is a higher priority goal than retirement spending, that's OK for your financial plan.

If we can agree that retiring sooner means less retirement spending, then it stands to reason that retiring later might lead to more retirement spending or improvements in other areas.

This is an example of the likely trade-off between when you retire and how much can afford to spend in retirement.

Now, maybe your company has a mandatory retirement age, but in my experience most don't. And if you have and can exercise some degree of control over the timing of your retirement (or other goals), it might mean more retirement spending. Or it might mean you can afford to take less investment risk. Or you might be able to leave more of a legacy behind to your children or grandchildren.

Retirement, like other financial goals, isn't as simple as "I've accumulated this much money and combined with Social Security and other sources of retirement income, I can afford to spend XX amount per year, until the market goes down and then I have to take what amounts to a pay cut."

What if instead of focusing on the timing of your retirement, we look at cash flow.

What if you saved as much as you possibly could over the next 12 months leading up to your retirement. It might not move the needle a lot on your retirement spending, but when it comes to your money, "a lot" is relative.

Also on the topic of cash flow, some of my clients, instead of planning for a single, all-encompassing retirement spending goal which will remain static throughout their retirement, prefer to "front-load" their retirement spending.

Presumably you're going to be healthier and more mobile in your 60s and 70s than you will be in your 80s and 90s. So naturally some folks want to plan to spend a little more in the first 10-20 years of retirement and spend less in the later years of retirement.

That's another illustration of choice and gives you and your advisor yet another variable you can adjust on an as-needed basis going forward.

Similarly, instead of a single spending number, I encourage many of my clients to think in terms of "basic lifestyle costs" and then everything else.

For example, instead of planning to spend $85,000 per year after-tax throughout your retirement years, what if we concluded that your "basic" lifestyle costs were $55,000 per year, and the remaining $30,000 per year could be allocated to things like travel, health care, car purchase and/or maintenance, learning opportunities, etc.

Once you've separated your spending into multiple "buckets" which represent things that are important to you, this leads to another layer of choice which you can use to exercise more control over your spending and your life.

In this scenario, if you have some unexpected expenses or the market drops, yes, you could lower your overall spending.

Or you could look at reducing one or more of your less important buckets for a period of time. Or you could adjust your travel bucket to happen every other year instead of every year for a while.

Sure, we're still talking about potentially reducing your spending, at least temporarily. But since many of us rely on techniques like mental accounting, I've found dividing your spending goals into a few major categories or buckets provides more choice and puts you more in control of your financial planning.

Finally, among the "big 3" is risk. What if you're able and willing to take a little more investment risk from time to time?

Well, if the market drops, instead of only reducing your spending levels, what if you took on a little more investment risk?

Not only could you possibly preserve your spending (and your lifestyle), but you would be moving more of your portfolio to stocks when the market is down. That makes sense, doesn't it?

And conversely, there may be times when the market is on an extended upswing. In that environment, sure you can increase your retirement spending, but it may be more important to you to reduce your investment risk.

And what better time to reduce your exposure to the stock market than when the market is going up?

These are just a few of the virtually unlimited examples of the choices present in your financial planning whether you're 1 year from retirement, 10 years from retirement or 15 years into retirement.

Yes, you can reduce your choice to simply adjusting your spending based on what the market's doing at any give time.

But I believe that's too simplistic an approach to financial planning.

And much more importantly, it's likely robbing you of choice and making you feel as if you have much less control on your financial decisions and your life.

You always have choices.

And it's important to understand what they are and explore the trade-offs among each of them.

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