When speaking with our clients about projections for retirement planning, we often will discuss the difference between models/projections and what can happen in the real world.
Below you’ll find out how we deal with those differences and we hope it’ll free you from trying to decide exactly how much you will spend on your future grandchildren each month of retirement.
The main variables in retirement planning have traditionally been current net worth, annual savings, retirement date, and desired income in retirement. But there are numerous other variables to consider:
- What will be the return of stock and bond markets?
- Will you retire during a bull or bear market? Does it matter?
- What will the inflation rate be going forward?
- How stable is Social Security?
- What if income tax rates move significantly higher or lower?
- What will healthcare cost in retirement?
- What will interest rates be?
- How much will you want to spend when you are 65, 75, or 85?
- What if an unexpected major expense comes up?
- Will you pay the expense of caring for aging parents?
- How do you generate income from investments?
- How long will you work?
- How long will you live?
- How long will your spouse live?
- Do you want to leave money to family when you die?
- How much will you give to charity now and during retirement?
- Should you carry debt in retirement?
- What is cost of living in your area?
- Do other people depend on you financially?
This list is just a start. I'm sure you could name 10 other variables that are specific to your situation. The main point is that retirement planning is complex and contains almost unlimited variables.
So what is the best way to approach retirement planning given these uncertainties?
The most important thing to understand is that retirement planning is a process not a one-time event. The plan should be updated on a regular basis with adjustment based on what has happened over the past year or two. Surprises will show up, it is inevitable. How you respond to these events is much more important than the event itself. Our clients don't hire us because we have all the answers but rather to have guidance along the way.
The sketch at the top of this page is based off of a drawing by Carl Richards. This is how we view retirement planning. The progress is not a straight line, all the variables we mentioned will be changing where you are now and maybe where you want to be in the future as well. The point is that you continue to make progress and narrow in on the outcome you desire as time passes.
In his book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, Carl Richards says:
The process of planning may — in fact, probably will — require us to chart a course that’s headed in the direction we hope to go. That may involve making some assumptions about the future. But reality-based planning acknowledges that such assumptions are mere guesses. We make the best guesses we can. Then we move on to the more productive business of investigating our current motives and circumstances, so that we can act from a place of understanding — not hope, not fear, but clarity.
I tell my clients that I’m giving them permission to let go of the need for precision in planning. Make the best guess you can and then move on. Put a stake in the ground thirty years out; think of it as a marker that you can always move later when you have more facts.
Think of the difference between a flight plan and an actual flight. Flight plans are really just the pilot’s best guess about things like the weather. No matter how much time the pilot spent planning, things don’t always go according to plan.
In fact, they rarely go just the way the pilot planned. There are just too many variables. So while the plan is important, the key to arriving safely is the pilot’s ability to make the small and consistent course corrections. It is about the course corrections, not the plan.
The retirement planning process is not creating a plan, putting it on the shelf, and in 20 years hoping it worked. A more effective approach is to make the best assumptions possible with the information that you have and then regularly reviewing and updating based on new information.
Retirement planning is a process because it never stops. Even when you actually retire, adjustments will still need to be made. Understanding and accepting that many things are beyond your control will help make a seemingly complex process much more manageable and even enjoyable.