Retirement used to be the second phase of the American Dream. You worked hard. Then you retired to the "golden years." Usually they were short in number. My father died two years after retiring. But during those years he had enough money.
That was then. Now, retiring has mutated from the reward for a long life of work into a potential economic catastrophe. The odds are you could face poverty or even outlive your money. That’s despite all your “retirement planning.”
Six developments which changed retirement
Retirement has become a downright threat to your financial well-being because of six developments.
Number one is extended longevity. For U.S. males the official number for their lifespan is 76.50 years, for females 81.30. That’s the average. Actually, you could live into your 90s and beyond. Recently, The New York Times featured six New Yorkers who were 85 or older.That age group is no longer atypical. What that means is that you could be retired for 25 or 30 years. That requires a lot of money.
Secondly, your career might have been cut short. You lost that good job and couldn’t find another. The number of people taking early Social Security tells the story. There has been a recent two percentage uptick.
Third, companies have been shifting from defined-benefit pensions to defined-contribution retirement plans. That made employees responsible for complex investment decisions. Many of you were unprepared for that burden. Economists such as Robert C. Merton view this as a major impediment to building and maintaining wealth.
Fourth, as we all know, two downturns since the turn of the century could have reduced the value of your assets, ranging from the family house to the investment portfolio.
Five, the traditional concept of the “nest egg” got broken. For those preparing to enter retirement, the Federal Reserve System found the median retirement account balance is $14,500.
And, sixth, inflation is likely to return to the typical rate of one percent to two percent annually. It could become higher.
As the result of these six intersecting factors, the 44 million of you already 65 or older are financially at risk. You could outlive your ability to maintain your lifestyle.
There is a solution
The good news is that, no matter what your financial situation is currently, you can improve it. Approach funding your retirement years as a work-in-progress. And you can prevent your own version of financial catastrophe.
Here are four essential strategies.
Question best practices, including the four-percent rule
Best practices were best for their times. Those times are over. That puts the burden on you to question the so-called experts.
During the days of the golden years, the four-percent rule dominated. Those in-the-know were convinced that if you withdrew four percent from your portfolio each year of retirement, you would live comfortably ever after.
Now there are simply too many new variables to take that number or most of the personal finance conventional wisdom too seriously. If you are well off, you might wind up being too frugal in withdrawing four percent in your 60s and 70s. In your 80s you might realize you could have enjoyed life much more when you were younger. If you are not well off you might wake up at age 72 and get it that the four percent withdrawal has left you perilously low on funds.
The raw reality on this one is: uncertainty. You don’t know how long you will live, what emergencies will come into life which deplete your nest egg, what financial markets will do, or what inflation will be.
You must accept that uncertainty. You can continually research what you need to understand in order to make smart decisions. And/or you can ask several financial advisors for a complimentary consultation. Then you partner with one to guide you. No, you can never “settle in” and assume you are “set.”
Re-evaluate your mindset about equities
When retirement lasted about a decade, standard was the 90-minus-your-age mandate. That pertained to the percentage of equities in your portfolio. If you were 60, then the asset allocation would include only 30 percent stocks. The rest would be low-risk investment vehicles such as bonds. It was assumed you should play it safe.
Currently, that assumption could be the most risky approach. Yes, you need to have a higher percentage of equities in your portfolio than was judged prudent historically.
But what percentage is one question. The second is what kinds of equities? And the third is how will they be “packaged?” Among the choices are individual stocks, exchange traded funds for stocks, mutual funds for stocks and more.
To address these questions you can factor in what long-term successful investor Warren Buffett recommends. That’s stick to what you understand. Sure, you can continue to add to your knowledge base. But it is dangerous to go beyond what you actually understand at the time.
Should you seek out guidance from a professional advisor? That professional could provide a “second opinion.” But you can’t afford, literally, to be a version of the “passive investor.” You have to continually monitor what is taking place in the financial markets and in your own portfolio. When there are changes, don’t panic.
Re-think home ownership
More retirees are opting to lease rather than owning their own home. This may seem odd. After all, there is the aging-in-place movement. That has been receiving a lot of positive media coverage. Communities are experimenting with how you can remain in the family house. In addition, traditionally real estate has been perceived as an asset which can appreciate significantly. In some locations, it still may be. Should the real estate market have a comprehensive recovery, then home ownership could return to being a smart investment.
But, increasingly, what’s also being acknowledged are the financial risks associated with owning your home. Those relate to market value, property taxes, routine maintenance costs, disasters which have high insurance deductibles, lack of liquidity, and inability to sell. In a sense, your money may be locked in, as with a hedge fund. But likely the potential payoff won’t be in the league of what hedge fund investors can anticipate.
There is also the opportunity cost. The funds plowed into home ownership are those which aren’t available for other kinds of investments. If interest rates continue to increase, those funds could be placed in a high-yield certificate of deposit. Also there are long-term opportunities such as buying rental property. That can provide continuous cash flow, along with possible ongoing market value appreciation.
Another factor to consider is the flexibility offered by leasing. Should your financial situation deteriorate, you can investigate survival initiatives such as relocating abroad. Low-cost options range from Cayo, Belize to Chiang Rai, Thailand.
The bottom line on leasing rather than continuing to own your own home is that renting gives you more control over your finances.
Continue to generate earned income
Until recently, retirement was primarily funded by passive income. That ranged from Social Security and pensions to an investment portfolio. Now, according to the 2015 CareerBuilder’s annual retirement survey, 54 percent of workers over-60 indicate they plan to continue working after they retire from their careers. That’s versus 45 percent in 2014. More than 80 percent will seek out part-time employment. Almost 20 percent will search for full-time work.
That trend is being endorsed as a simple, common sense solution for financial angst in retirement. You get a job or you start a business. A growing number of companies are making it their business to recruit older workers. Those include Home Depot, ESW, and Vita Needle Company. Last summer I was in a Home Depot in Tucson, Arizona, which was celebrating an employee’s 80th birthday.
But the driver for continuing to work isn’t only financial. Living life without some kind of paid employment or operating an enterprise is a lifestyle change many retirees can’t handle. After all, America is the global headquarters for capitalism. You are what you do to earn money. Returning to work not only restores them emotionally. It can save marriages.
Actually, there could be two distinct cultures evolving among retirees. One is made up of those who continue to work. Another consists of those who truly retire from all paid employment.
Yes, retirement may go way of the dumb phone
You may be the last generation which finds yourself in the box called “retirement.” So much financial, social, and cultural change is under way that soon enough there will be no such entity known as “retirement.” It may be as yesterday as the dumb phone.
But, meanwhile you have to make ends meet for what will probably be decades. You can do that. Yes, there is a solution. It requires you be constantly vigilant. You are the Chief Financial Officer of your retirement.