How to Live Comfortably in Retirement

Over Labor Day weekend Jill, the kids, and I went to a cookout at a friend’s house. At the cookout I got chatting with a very nice couple, I’ll call them John and Di. They are a hard-working couple from North Falmouth, in their mid-50’s, with two wonderful girls both now in their 20s. One’s following in her mom’s footsteps as a teacher in Sandwich, and the other is a nurse in Plymouth. With an empty nest, John and Di are looking to the future. While retirement for them both is still quite a way off, John confessed to me that he’s worried he’s not doing enough to make sure that he and Di will be able to live comfortably once that time comes.

Hmmm . . . John and Di are not alone.

In fact, only about 17% of workers feel confident in their ability to live comfortably in retirement, according to the latest data from the Employee Benefits Research Institute. Frankly, I am not surprised by this. It seems like every day, we’re assaulted with news about Social Security solvency, the rising cost of health care in retirement, and other worrisome trends that make some of us wonder if we’re doing enough. Others wonder if we’ll ever be able to retire at all.

Folks, if you’re in the same boat as John and Di, let me share with you some of the suggestions I offered to them on how to create a sound retirement system to help ensure that you are also well-prepared for retirement.

First, consider your lifestyle. Is the way you’re living today consistent with how you expect to live after you retire? Is it sustainable? A common rule of thumb among financial advisors suggests that you will need about 70%-80% of your pre-retirement income to retire comfortably. Where will that money come from?

Don’t count on Social Security benefits to fill that gap. The Social Security Administration itself says that its retirement benefits will replace only about 40% of the earnings of the average beneficiary – less for people in higher income brackets, more for people with lower incomes.

Like many of us, John and Di expect they’ll continue to work part-time in retirement, another vital income stream in later years. Di’s pension as a teacher will also be a steady income source for them.

What’s more, John and Di both have retirement investments they plan to draw income from after they stop working full-time. So, as John and Di move from their years of asset accumulation to distribution, managing gains is crucial for them. However, they must keep in mind that managing losses is even more important. I encouraged them to understand how their current strategy would behave during significant down years, such as 2001, 2002, and 2008. Looking at their portfolio’s drawdown – the difference in its value between its peak and trough – would help to give them an idea of their current strategy’s downside risk. This is a critical thread of information to help ensure a sound retirement system.

I later learned that a few days later John and Di had a chance to back-test their portfolio. They estimated that 42% of their current portfolio would have evaporated if another event like 2008 were to occur. That’s an inappropriate level of downside risk for any couple planning for retirement income. I explained to them how implementing a rules-based investment strategy using quantative data could help to give them the highest probability of financial success. Diversifying between different asset classes – domestic and international stocks, bonds, short-term investments, and alternatives – could also help reduce that exposure.

We also discussed how John and Di should invest with their heads . . . and not with their hearts. Instituting a rules-based, fact-driven, coupled around quantative data using tactical and strategic risk triggers can help them avoid becoming that emotional investor who, historically, can make poor investment choices at the worst possible time.

My next suggestion: make compounding interest work for you, not the banks. Like many of us, John and Di helped finance their daughters’ college education, are carrying credit card debt, and have a home equity line of credit (HELOC). I advised them to stop paying the banks interest and to start earning interest themselves. Revolving debt negatively effects your credit score, and high credit card interest is money wasted that could be doing much more for you now and in your retirement years. So, chipping away at this now and over time will help them secure a comfortable retirement.

Living comfortably in retirement means much more than just having enough income. Even if you continue to work part-time, as John and Di want to do, you should plan to have a happy and fulfilling life in retirement. What is your plan? I find that folks often overlook the non-financial aspects in preparing for their retirement years.

Maybe there are activities you merely don’t have the time for now – hobbies and sports that you’d like to master. Or perhaps you and your spouse would want to travel, as John and Di do. Being able to plan and budget those experiences should be a fundamental component in your retirement system. You may discover as you research, plan and budget those experiences that you may have to pivot your investment strategy and your lifestyle to accommodate them.

John and Di also need to think about the high cost of health care in retirement. Get this: according to Fidelity, the average 65-year-old couple retiring in 2018 will require roughly $280,000 to cover health and medical expenses. While Medicare will help ease their burden, Medicare does not cover all health care expenses, such as long-term care. “Medigap” plans and other supplemental insurance should be part of your retirement budget, as well.

Paying for long-term care is one of the most daunting challenges today’s retirees face, and a disturbing fact is that same couple turning 65 this year stands a 70% chance of requiring long-term care services, according to the U.S. Department of Health and Human Services . To that end, I suggested to John and Di that they consider an asset-based long-term care insurance (LTCI) policy. An LTCI policy provides not only for long-term care but also pays a death benefit to one’s heirs, if such care is not needed. Remember, it’s important to work with a qualified retirement specialist to help you understand what you are purchasing, when considering an LTCI policy.

With John and Di’s daughters settling down and starting families, they hope to have a legacy to leave their grandchildren. While John and Di are not super-wealthy, I explained to them that is no excuse for not having a sound estate plan as part of their retirement system. A successful estate plan helps to make sure their assets are disbursed according to their wishes, while minimizing the tax impact it will have on their heirs.

It was a pleasure to help John and Di create and to implement a sound retirement system that included implementing a rules-based investment strategy to help reduce risk, aggressively paying down debt, and preparing for their long-term needs and goals. What’s your system?

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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