I have a buddy, I’ll call him Ted, who is a highly successful finance executive with a large corporation in Boston. Ted and I met in business school and both worked for KPMG in Boston together in the ‘90s. While you’d think he’d have a natural ability for dealing with budgets and numbers, the other day he shared one of the lessons he had to learn the hard way. He told me a story about a time towards the end of his college days when he lived on two slices of pizza and a side salad once a day for a month. He had budgeted down to his last dollar before his last financial aid check arrived when the grocery store where he worked part-time suddenly shut down. He was too proud to ask his parents for help, so he turned to the daily special at Boston House of Pizza on Huntington Avenue and the odd meal at friends’ houses for sustenance. When I asked him what it was like, he said, “Well, Jeff, the day my financial aid check cleared I was so sick of pizza and so hungry, I ate three Big Macs in one sitting”.
You know, we can all probably think back to some lean times when we were first on our own. Many of us discovered how coupons worked and developed a keen eye for daily specials. The good news is that most of us also learned from those times that our finances are sometime subject to outside factors that we can’t control. Because of that, we discovered that it was helpful to have plans and contingencies in place over some of the things that we can control.
While Ted’s hardship in college may be a bit on the extreme side, it calls to mind that our retirement picture can be continually changing right up to the time we leave the work force – and often even during retirement. So much of the focus of financial planning is about accumulating and protecting the funds that we will need to live on in retirement, as well as the income level those assets can create once we do retire. We operate at a certain income level during our earning years and, for most of us that will change in retirement. Often our income needs go down in retirement because our homes are paid for, we don’t have our daily commutes, we may pay less in taxes, kids are hopefully “off the payroll”, and we are no longer saving for retirement. This spending in retirement is often referred to as our retirement income ratio. When figuring out what your own ratio is, a common starting point for many is to assume that you will need somewhere around 70% of the income you earned in the years just prior to retirement. You can then increase or decrease that amount depending on your unique spending plans in retirement to come up with a ratio that makes sense for you.
However, with the current volatility that the pandemic has brought, it’s been suggested that many people will find that their ratio of income available is somewhat lower than anticipated. Over the weekend I was reading a very interesting analysis from the New School Schwartz Center for Economic Policy. It gave the example of a 65 year old retiring today at a 69% retirement income ratio might see that income ratio fall as low as 60% due to economic uncertainty happening now. Like my friend Ted during that hungry month in college, many people at or nearing retirement are dealing with the fact that a sudden event that is (hopefully) short term in nature could affect the amount of money they’ll have to retire with.
When we talk to folks about how they envision their retirement and how they want to spend their time, it almost always comes down to questions about their anticipated lifestyle. For example, do they plan to downsize their home? Do they want to help relatives and grandkids? Do they want to travel extensively? These are just a few of the questions that we cover with folks when we ask them to visualize their future lives in retirement. We all expect that there will be times of economic downturn for our portfolio at times, and for some folks, it’s happening now as they approach retirement. Because of that, it’s important to discuss ways to prioritize our wants and needs in retirement. After all, all of this is part of the broader retirement plan.
As with past economic downturns, our current situation has people asking, “Just what is my retirement income ratio now, and is it enough for me to retire? Does this mean I need to delay or defer my retirement?” For those who have planned and developed a solid retirement system specifically designed to use quantitative data to help mitigate significant market losses within a portfolio, more often than not the answer is, “No, you can still retire as planned”. You see, preparation must be the building blocks to any successful distribution retirement system.
However, if you have not prepared properly and you are five, ten or even fifteen years from retirement, our current economic uncertainty not just presently, but what is potentially on the horizon, is offering a strong call to take action. Now is the time for you to take control of the factors that you can now and better prepare for an income level that can support you in retirement. Folks, now is the time to take steps to protect your retirement ratio. Now is the time to review your system with a retirement specialist to ensure you have the proper systems in place. A system that has to include downside risk mitigation within your investment plan, concrete income planning that is measurable and predictable, and proper tax planning to ensure efficiency.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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