Last week we hosted a painting event to allow everyone an opportunity to visualize their ideal retirement. As everyone began to paint, it was clear that people's preferences were quite different from the person sitting right next to them (sometimes, even husbands and wives had different ideas of how they wanted to spend their retirement years). As the picture above depicts, there were a few popular themes: retiring to warmer climates, exotic places the person hadn't yet traveled to, and places that offered more outdoor activities.
This just demonstrated the big reason WHY financial plans should be individualized and financial advice shouldn't be based on generic rules of thumb: when it comes to your retirement planning, your plan should be designed with your specific preferences in mind and not the "average" American.
Case in point: I recently read an article about the rule of thumb when it comes to retirement, and how we should all focus on cutting spending in order to be able to sustain ourselves in the future when we stop working full time. I read that and thought that while this strategy might make sense for a large portion of the population who weren't able to save as much as required to sustain their current spending habits and lifestyle, for a lot of our clients retirement equates to more extra time and the opportunity to travel more. And with that, planning to create enough income for all those activities-which might mean spending more and not less.
Corey Higgins, who is one of our strategic partners and helps us to implement certain retirement income solutions from Nationwide discussed some of the financial risks we will all face in retirement-with the help of the acronym LIVE: longevity, inflation, volatility and the economy. Let's dive into these popular terms:
Longevity: There’s a 25% chance that a 65-year-old man will live to 93; a 25% chance that a 65-year-old woman will live to 96; and for a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98, according to SOA projections. Moral of the story is we are living longer due to several factors including medical advances, so a conservative retirement plan should provide income until at least 95 years of age. Often, we create a financial plan that provides income until 100 just to be safe.
Inflation: A stamp back in 1988 cost $.24. Fast forward to 2019 and a stamp will set you back $.55. That's about a 2.8% inflation rate per year over that period. Sometimes we don't notice the small, incremental price increases of the goods and services we purchase but over a longer period of time it sure adds up.
It's similar to seeing my toddlers grow-my boys are 4 and 2 years old...I don't notice how quickly they've grown into little men because I see them every day, but every time the grand parents visit from out of town they tell me just how big the change is from the months prior.
Volatility: the level of variation in the markets. If you want to travel from Chicago to France then you’re going to have to fly. Likewise, if you want to achieve any long-term financial goal, chances are that you’re going to have to invest some of your money. An 8-hour flight is invariably going to experience some degree of flight turbulence and when it does our normal response is fear. The less I travel, the more this experience of turbulence causes me to panic and wonder if we are about to crash and die. It's a super emotional experience especially since I am a mother now, and I start thinking about my estate plan and my kids, my life insurance policies and completely loose it...
But over time, with experience it becomes easier to make terms with what flight turbulence is, having encountered it more often, completed flights safely every time and possibly gained an educated understanding of what turbulence is. Whether it’s caused by wind, jet streams or pockets of rising air, experienced flyers learn to place their automatic and emotional reaction to turbulence in check, replacing it with a more rational, informed response. This tends to be true for investing also, and having the experience coupled with a financial plan and an advisor can alleviate concerns over the inescapable volatility in the stock market. It's about drafting an investing plan that fits your needs and tolerance for risk.
Economy: the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services in its most basic meaning.
The economy's state is determined by the supply and demand for goods and services on a global scale today, and many factors affect this balance, from politics, to central banks actions, trade wars and tariffs, etc. When the economy is growing it typically results in positive earnings for companies, and the stock market benefits as a result.
A big take away from the list of these 4 variables is that as individuals we seldom control these factors that can have a significant impact on our financial plans, so we have to focus on the variables we can control and continue to review and adjust our plans to make our ideal retirement within reach.
Waddell & Reed is not affiliated with Corey Higgins or Nationwide.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. Investing involves risk, including the potential for loss of principal.