By far, the #1 financial planning question we get from clients is “Can I afford to retire?” For younger folks it’s usually “How much should I save for a comfortable retirement?” and for those already retired it’s “How much can I spend and not run out of money?” All revolve around the theme of retirement financial security.
In the media, considerable attention is focused on this theme; we have all seen the ING commercial urging you to calculate “your number.” Every large financial services firm has their own calculator on their website to help you figure out what your number is. You think you are bombarded with this stuff? You should see the financial periodicals we get. There isn’t a month that goes by without an article on “sustainable withdrawal rates in retirement.” Every conference I go to has at least one session on that very topic. And they are by no means consistent in their
advice. In this month’s Journal of Financial Planning, I read a feature article by two respected members of the planning community, who, contrary to conventional thinking, were advancing the theory that you should start with a low allocation to stocks at retirement and increase it as you approach your 90’s. Say that again?
Sorting through all this, a few key points ring true to us.
Calculating “your number” is complicated. A good analysis starts with doing some serious homework on your retirement goals; mostly thinking about how your goals and your retirement spending relate. Skipping that step means you’ll have to fall back on rules of thumb like “retirees spend about 25% less than they do pre-retirement.” It’s just not that simple, and those “rules” can be misleading.
It really is personal. Ignore what your neighbor or brother-in-law is doing. There are no benchmarks to measure against. Your cash flow needs in retirement are unique to you. Your goals with respect to lifestyle, charity or family gifting are unique to you. This may sound elementary, but our human nature is such that we like to compare ourselves to others as a way of assessing how we are doing. In this case, it can be dangerous.Try to focus on you and your unique situation.
Focus on cash flow. When it comes to investing during retirement, focus on cash flow, not benchmark returns (such as outperforming the S&P 500). Many investment plans are focused on matching or beating benchmarks. That may be OK when you are in the accumulation phase but most of us should shift our focus to generating cash flow at retirement. Borrowing a metaphor from an excellent article I read many, many years ago, investors can be either chicken farmers, mostly concerned about the price of chickens, or egg farmers concerned about egg production. At retirement, think about becoming an egg farmer. You want eggs (interest and dividends from your portfolio). You understand the price of chickens (the value of your portfolio) will be volatile, but that’s not your primary concern; you aren’t selling them today anyway. My advice: ignore all the daily clucking about chicken prices, focus on steady and consistent egg production and you should sleep better at night.
As you review your own retirement planning and investment strategy, I urge you to understand the cash flow from your portfolio and the role it plays. We are happy to discuss how cash flow impacts our investment process, how the cash flow from your portfolio has changed over time and how it might behave in a bear market or rising-interest-rate environment.
No matter where you are in the process of retirement planning, we want you to be able to answer the question “how am I doing?” with a “pretty well, thank you.” It’s not easy, but it’s certainly doable if you stick with your plan, execute your strategy through good times and bad and strive to achieve your unique goals.