Financial planning ideas as you think about retirement

March 15, 2024

Today we're going to focus on the practical. No more of this pie-in-the-sky economics theory, let's talk about some retirement financial planning issues.

Lots of people pay for financial plans that come in big binders. Almost no one actually reads the plan, from what I can tell, and some level below "almost no one" actually does anything about it if they have it. One of the problems with a Monte Carlo-type financial plan, where a bunch of inputs are plugged in and then you see some curves that tell you where you might be in 10 or 15 years, is that if you change one input even a little bit the scenario 15 years from now swings wildly.

Keep in mind: the concept of full retirement is extremely new in human history. It's only a couple generations old. This is in part due to the fact that people are living longer.

Let me share some observations that you can use in your own thinking. These are generalizations from many client meetings, so not all of them will apply to you.

1. Many people are not fully retired throughout their 60's, and even into their 70's. Sometimes they retire and then go back to work part-time. It's often a lighter, more flexible, happier job, but it produces some cash flow. This is good.
2. You hear a lot about the importance of time and compounding, and the reasons why an investor should get started early. This is true! But the sixties decade cannot be ignored. Capital additions versus removals in a person's sixties matter a lot if they live into their eighties or beyond.
3. Spending tends to go up when people retire, at least for a period of time. I see plans that predict spending dropping, but with more time on their hands, it seems to increase. For most people, a real budget and spending control is the most important financial planning tool.
   
   (That being said, you want to live in an economy where other people spend. If people don't spend, companies can't run and transactions don't occur. The savings rate can't get too high or things slow down, as they have on the Asian rim over the past couple of decades. I'm not worried about this in America, we tend to like to spend.)
4. Later in life medical and assisted living spending become significant. For those of you who have not looked at this, relatively nice assisted living runs about $8,000 / month now, increasing above inflation, and there are waiting lists at that price. I expect this cost to go up significantly as the labor shortage is real in this industry and it is holding the supply back. Clearly this is not affordable for a large percentage of the population, and other plans have to be made.
5. The direction of the stock market in the first five to ten years of your retirement matters a lot. That's fun because you have no control over it! Remember that from the top of the dot-com peak in 2000, it took over 12 years, including all dividends reinvested, to get back above that point for good, and that included no inflation. We try to hedge this risk by using multiple asset classes, but it's still something you need to consider. The market might just go flat or down for the first decade of retirement, so extra buffer is needed.
6. There are certain social security decisions that matter, and a lot of the online discussion doesn't mention cost of capital and opportunity costs. So if you're a client and you are in your sixties it's worth talking to your Advisor about this.

Dan Cunningham