How My Hip Surgery Got Me Thinking about What I’m Retiring To

I had my hip replaced last month.  After spending three days in the hospital, I spent a couple weeks at home recovering.  And I was bored.  Really, you can watch only so many reruns of Gun Smoke or CNN’s nonstop coverage of Trump and Comey before all your energy is depleted.  The hospital certainly isn’t a resort, but, unlike my house, it’s buzzing with activity.  Just ask anyone who’s ever tried to settle into a long nap during a hospital stay.

Anyhow, I’m on my way to a full recovery.  While I was home, however, I had time to think.  That is, think about my retirement.  Not that I’m planning on retiring any time soon, but my recovery has given me time to envision what I want my retirement to look like.  And that vision doesn’t include old TV westerns.

Most of us don’t spend nearly enough time thinking about what we want our retirement to look like.  Instead, we tend to create this grand vision of what we think retirement will be like.  Most of us have been misled to believe that retirement is nirvana with endless days playing golf or sitting on a beach sipping drinks with umbrellas.

If you’re 5 to 10 years out from retirement, now is the time to start exploring the meaning of your work.  What role is work playing in your life? If you’re like most, you tend to undervalue the benefits of work in your life.  They go well beyond collecting a paycheck.  French researchers have found a link between delaying retirement and reducing the risk of Alzheimer’s and other mind-robbing diseases.  For each additional year you work, you reduce your risk by 3.2 percent.  What’s more, working longer also contributes to longevity.  On a recent retirement webinar, the facilitator cited an 11% (!) increase in life span for each additional year people work.  As an investment advisor, I’d say that’s a pretty good return.  What it all comes down to is staying engaged.  It’s the engagement with life that helps prolong life.

Let’s be clear.  Just because you’re leaving work, doesn’t mean you’re retiring.  Sure, you know what you’re retiring from, but what are you retiring to?  Our parents’ generation maydownload (1) have said, “When I retire, I’ll never work again.”  But today’s retirees are striving for more of a balance.  Most people are happiest when they find the perfect balance between purpose and pleasure.  Ironically, our pleasure (or leisure time) draws its meaning from work.  For instance, we all know someone who can’t wait to hit the golf course on the weekend.  His tee times are usually earlier than he’s rolling out of bed during the work week.  But golfer beware:  there’s a diminishing law of returns on leisure.  And when we retire, every day will not be a Saturday.  The thing you’re looking to for joy and fun can over time make you grumpy.  Do you really want golf to become your job?

In the past, my clients may have asked “Do I have enough money to retire?”  Or “Have I had enough?”  Now, clients are more apt to ask “Will I have enough to do?”  All of us, whether we’re a multimillionaire or someone who will be living on little more than our social security, will have the exact same amount of time to fill each week—168 hours.  If you don’t have a plan for maximizing your time, the next stage of your life may not be as fulfilling as you had envisioned.

Finding powerful reasons to get up in the morning will be as important in your retirement as funding it.  Don’t confuse leisure with happiness.  People tend to lean on leisure for fulfillment.  But we really can’t be happy without pleasure and purpose.  There are plenty of people who wake up seeking pleasure only to return to bed empty.  Successful retirees do things that they’re curious about.  They do things that bring value to others and meaning to themselves.  They’ve explored the meaning of work in their lives and find a way to make it a part of their retirement.

Two Schools of Retirement Income Planning

My job description is pretty straightforward: Manage your money so that it will last as long as you do. Making that happen, though, isn’t as clear-cut. In my business, there are traditionally two opposing positions about creating retirement income plans. One is guaranteed income, and the other is investing your money. The first, of course, is all about safety. For clients who are risk adverse, guaranteed income might be the better way to go. For those, however, who want to maximize their wealth by seeking a higher possible return, there is the Total Return philosophy. The latter is holding a diversified portfolio* of stocks and bonds with no guarantees on what you will earn. I’m not an all or nothing person. I believe that you can live your best life now and have the quality of life you desire later by integrating both philosophies.

First, let’s define what I mean by guaranteed income. Maybe I shouldn’t call it “guaranteed” because nothing is guaranteed in this life. “Safety-first” may be a better description. Nevertheless, it comprises Social Security, defined benefit pensions, bond ladders, reverse mortgages and possibly income annuities. The objective of a safety-first retirement income planning strategy is to ensure that your monthly expenses–the necessities–will be met whatever the market conditions are. This safety-first strategy may sound appealing to you, but most safe investments do not keep pace with inflation. Prioritizing your goals is the main ingredient of this strategy.

In contrast to this risk-adverse strategy is holding a total return-driven portfolio comprised of the right mix of stocks, bonds and cash. We’re talking about asset allocation which doesn’t guarantee that you won’t ever lose money but may keep the losses palatable. Here the objective is to maximize the likelihood of successfully meeting your overall lifestyle goals and attempting to outpace the ever-rising cost of living. However, designing the best asset allocation model or portfolio can be complex. You need to look at your time horizon and your tolerance to risk. Your mix of stocks and bonds should be determined by the amount of money you need to withdraw from your accounts.

I’ve been helping people retire for nearly 30 years and know that investing during your retirement years is trickier than saving for retirement. Retirees tend to worry that their money is at risk in the stock market, or they’re not being conservative enough. Outliving their money is an even greater worry. However, as you near retirement age, you should be weighing personal concerns with other realities that you may not have considered. For instance, we’re living longer. It’s not unusual now for retirement to last 30, even 35 years. Also, the cost of living continues to rise. Factoring in an average historical inflation of 3%, your retirement income needs may triple over a 30-year retirement! If you’re 80 years old, I doubt you want to go back to work to support your lifestyle.

Balancing all these factors can be challenging. For sure, you don’t want to be financially teetering in your retirement. That’s why I advocate for using both schools of thought in creating retirement plans. Guaranteed income acts as an insurance to cover your monthly expenses, and a return-driven portfolio, with solid investments, may give you a better opportunity of not only increasing the value of your portfolio but outpacing inflation.

Retirement income planning is a long-term strategy for helping you sustain your lifestyle. It’s really about helping to make sure that you won’t run out of money after you retire and that your money keeps pace with inflation. If you’re five to ten years away from retiring, consider meeting with a fee-based financial planner to design a quality retirement plan that will lay the foundation for your retirement income. You want to be ready for the ordinary costs and the uncertainties in the next stage of your life.

* While there is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, and it does not assure against market loss, a diversified portfolio may reduce a portfolio’s volatility and potential loss. In reference to general account obligations and guarantees, such as is present with some annuities, the ability for the insurance company to meet these obligations to policyholders are subject to sufficient capital, liquidity, cash flow and other resources of the insurance company. A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio.