In a typical week I’ll have 3-5 ‘one-on-one’ meetings to help people make financial decisions with massive long-term consequences.
‘How do we purchase our first home?’
‘How can I financially split from my partner’
‘What’s the best way to invest now, now there’s a bit of money coming in?’
For the perfectionist, it can trigger anxiety. For the ambitious, it’s a distraction. For everyone else, ‘cognitive narco-numerical disorder’ can strike at any time (falling asleep at the first mention of the R-word). Retirement.
Almost two-thirds of us don’t feel prepared for retirement, possibly because we don’t know the costs.
If you want to feel prepared, I’d start with the hardest question first: How much will it cost? If you know the cost of your bucket, you’ll feel confident when it’s time to kick it.
The cost depends entirely on you, of course.
1 – What kind of life do you want? If we’re not careful, we’ll approach retirement planning passively, most likely only thinking of it when we’re almost in it. A little planning, when it’s far off into the future can make all the difference between just living, and living your best life. Do you want to travel, help the kids into their homes, or give to charity? Figure it all out ahead of time so you can see it – you’re more likely to hit targets you stare at, so remember to stare at good targets!
2 – What really are your options?
There’s no point ordering off the menu here – what are your options? It’s not about subscribing to an off-the-shelf plan – it’s about designing the best outcome from a range of potential pathways. ‘Just enough’ is a great achievement for some, but for others, it’s soul destroying. Aiming for more now, means you’re more likely to do more, later.
3 – When do you want it to start? We’re not talking about a retreat from life here, and remember this is your life, not your parents. Unless it’s a job you’d genuinely do for free, when do you want to quit working because you have to? Age 65 triggers a bus pass, government super, and the ability to withdraw KiwiSaver, but don’t let all that dictate what you choose here.
4 – When will it all end? One of the reasons why many of us hate retirement planning, is because it forces us to confront our finiteness. Money can be a representation of one’s entire life in the form of time, and effort. Knowing when that runs, out, is ideally when you run out is a pretty scary thought. Confronting for real what the afterlife is going to be like, and regret over progress can also subconsciously stop us from working this out. Make the very best guess you can here – it’s important.
The only thing more tragic than running out of money late in life, is running out of life, with too much money.
As you can see, retirement requires a little guesswork.
Financial advisers can help a lot here, but these days, you can also make good progress reading articles and books and listening to podcasts. Even a rough plan today can improve your quality of life later.
‘Rules of Thumb Are Great, But What About Me?’
In 1994, William Bengen invented the 4% rule. In its simplest form, it helps you work out an amount you can withdraw from a pile of money invested, without ever running out. Let’s say you have $100k at age 65, for example – if it’s invested in a balanced fund of equities and bonds, you can safely withdraw $4k a year. It works in reverse too.
A balanced fund is a KiwiSaver or other managed fund that typically has around 50-60% invested in ‘growth assets’ (shares and commercial property), and 40-50% in ‘income assets’ like bonds and cash. The idea is to maintain some growth in the amount invested, while maintaining stability and certainty of returns.
Let’s say to retire with options, you needed an ‘income’ of $40k a year. The 4% rule means that when you stop work, you should have $1m invested ($1,000,000 x 0.04 = $40,000).
‘But what about me?’ Knowing the amount you’ll need each year is the hard part, but not because it’s complicated. It’s hard because to predict your future spending, you need to track your current spending. Most of us hate budgeting, but online tools powered by your bank feed (like SortMe) means there’s no excuse to get this done. Once you can see where your money currently goes, you can guess better where it’ll go tomorrow. Apart from insurance, the good news is, most things become slightly cheaper when you’re older. No more children looking for handouts (hopefully), you’re buying less food, and you might be living mortgage-free. Knowing how much you’ll actually spend, though, still requires some guesswork.
Another example?
Let’s say you want to create ‘income’ of $50k each year from 65 years old. With the 4% rule, you’ll need to have $1.250m invested. (If you’re 35 btw, to achieve this, aim to invest about $400 per week).
The 4% rule makes this simple, but does it work in retirement planning? Sort of. In my experience, most people using this rule underspend at the start, and overspend at the end. Some feel the 4% rule is too conservative, also. Studies have also shown that 80% of people, end up with nearly three times their initial investment at the end of life. That’s fine if, it was on purpose. It’s tragic, if you or your family went without for a better future that never had a chance to show up. Conservatism can be a killer, but the main issue I have with the 4% rule, is that it assumes we live in straight line. Chances are, we won’t spend the same amount each year because we’ll be doing different things. Wiggly people shouldn’t take straight lines too seriously!
Tomorrow’s ‘U’ and the Three Stages of Retirement
Because our retirement life is U-shaped, we need to allow for different amounts of spending. You might start with the 4% rule, but then ‘tune’ it for your 3 distinct phases in retirement:
1 – The ‘Mountain Tops’ phase is all about living the life you hit pause on when kids came along. Ideally your good health, and your wealth, enables you to live a life almost entirely on your own terms. Remember, most underspend here – this will be your natural instinct, also. Your entire life was about accumulation and building a type of ‘structure’ that you’re now placing weight on. Added to that is the fact you’re spending isn’t being replenished from your labor, but from capital. Working out costs for travel, hobbies, and family in advance, helps create ‘permission’ to spend guilt free. These can be the exciting years, but inevitably it all slows down.
2 – The ‘Valley’ phase. This might start with the death of a spouse, or a significant health change. It’s slower now, and the good news? The bottom part of the ‘U’ is often the most affordable phase. Home ownership offers an additional benefit here, as selling the home can fund the next phase.
Here’s a pro tip: If you have health insurance still, try to keep it. Although premiums become incredibly expensive, it can work well to protect your remaining nest egg from unexpected health procedures while transiting ‘The Valley’ part of retirement.
3 – The ‘New Horizons’ phase. It’s not just a fitting name for a retirement village; it perfectly captures the essence of that final third of your retirement—and your life. It comes with a higher cost than ‘The Valley,’ though. Some families might be more involved in providing care than others, and there are loads of other unexpecting things to consider, but it’s better not being worried about money. The ‘New Horizons’ phase requires careful planning to balance needs and wants. Some resist change and cling to their own homes. Others opt to embrace the moment sooner and give life one last push. Either way, it’s expensive at the end of ‘tomorrow’s U’.
Tomorrow’s ‘U’ is dependent on today’s ‘U’ to get this right.
After you’ve bought the house, raised the kids, and had that last bit of fun, it’s easy to overlook the last mile. Don’t avoid it, though, as it makes a massive difference. Your spending won’t be a straight line, as your life will still change. Your spending won’t be a straight line, but start with a rule of thumb, imagine the future you want, and achieve the best you can. One third of your life might depend on where you’re at while reading this, and the choices you make from here on in. Here’s to living a good, well-funded life, which leave others better off. I’m here for it, are you?
Disclaimer: Your situation’s different, so take care when acting on general information like this. If you’re stuck with your retirement options, or it’s complicated, reach out to a financial adviser.
