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.

Retiring On Purpose

I ran into a friend recently who’s a hairdresser. He’s been in the business now for 50 years and has seen it all from the bouffant to the bob. After owning his own salon for as many years, he’s looking to sell it—on one condition: He stays as an employee. Despite being nearly 75, he has no plans to retire. Like he says, “What would I do every day?”

His story’s not that unusual. According to a June 2016 Pew Research Center analysis of employment data from the federal Bureau of Labor Statistics, more older Americans – those ages 65 and older – are working than at any time since the turn of the century, and today’s older workers are spending more time on the job than did their peers in previous years.

This is a new era of retirement revolution. Pensions and corporate stewardship have gone the way of the dinosaur. For some, not working isn’t an option; however, many are choosing to stay in the workforce—and thriving. As someone who’s been helping people retire for the past 25 years, I’ve witnessed the change in attitudes first-hand about retirement. Today I’d be negligent if I planned a client’s retirement assuming that he or she will be leaving the workforce at age 65. As a financial planner, I must get a sense of my client’s true age. By that, I mean his biological age, not his chronological age. For instance, I may have a client who’s 62, but he feels more like 50. He’ll have no intention of retiring in a few years. Like my hairdresser friend, he refuses to be defined by his age.

For me, the planning has evolved from retiring to retiring on purpose. We’re living longer, and we want to stay relevant. If you’re 5 to 10 years out from retiring, finding a reason to get up in the morning will be as important as the financial planning. Think about it: What if every day was a Saturday? Sure, the first several might seem blissful with days spent on the golf course or shopping at Target, but after a while, you’d probably get bored. Carlos Santana, the famous guitarist said, “The only thing that has ever made me feel old is those few times where I allow myself to be predictable. Routine is death.”

Besides keeping you alive (That’s true. Oregon State University found that people who continue to work past 65 have an 11% lower chance of death from all causes), the benefits of working into an older age are numerous. Of course, there are the financial benefits. The more years you work, the less money you’ll need take out of your retirement accounts. And you can delay taking your Social Security. For each year you delay between the ages of 62 and 70, your benefits grow by 8% annually.

The mental benefits are just as important. Working longer keeps your mind sharp. Like the saying goes, “Use it or lose it.” It also keeps you connected to other people, decreasing the chance of isolation. Moreover, and perhaps most important, working can give you a purpose, a sense of identity, a reason for getting up in the morning.

If you still need a little inspiration or motivation to retire on purpose, just look to some of these stars in their 70s: Helen Mirren, Robert DeNiro, Betty White, Morgan Freeman, Dick Van Dyke, Al Pacino, Mick Jagger. Like Mick said, “How Can I Stop?”

“I Wish You Were My Financial Advisor”

My clients and other people may think that I spend my work day watching the stock market and making trades. I actually do neither. My job is to help my clients achieve their personal and financial goals, not to outguess the markets. After all, I’m a financial advisor, not an astrologer. Besides, neither daily stock market analysis nor trading add any value to my clients’ accounts. Sure, I may occasionally tweak my clients’ accounts, but more often than not, I spend my days caught up in the minute details of my clients’ accounts. It’s certainly not the most glamorous part of my job, but it’s a very important one.

Let me give you an example. A recently widowed client came in for an appointment several months after her husband’s death so that we could review her financial security and change the beneficiaries of her accounts. We first addressed her financial security going forward, and I assured her she had enough money to last her the rest of her life. By the way, that’s my principal role in my clients’ lives—making sure they don’t outlive their money and can enjoy a worry-free retirement. Anyway, this widow had four different accounts, all of which her deceased husband was either the joint owner or the primary beneficiary. So the next task was changing the beneficiaries and ownership of these accounts. We wanted to make sure there would be a smooth transition of funds in case something happened to her.

What we did was a simple procedure that any good financial advisor would do. But a week later, we also performed a standard operating procedure which my firm employs. That is, confirming that the brokerage company we use entered all my client’s information correctly. Sure enough, we found several mistakes. For instance, we noticed that of one of the beneficiaries’ last name was spelled incorrectly and saw that another account’s beneficiaries hadn’t even been changed.

So I called the brokerage firm and told the service representative that we had discovered these two mistakes. She immediately corrected the two errors, and asked me if there was anything else I needed. I said I was good to go, and she said, “I really appreciate your attention to detail. I wish you were my financial advisor.” I thanked her for the compliment and then went about my mundane day, ignoring the gyrations of the stock market.

(This article was originally published on Paladin Registry: http://blog.paladinregistry.com/advisors-2/i-wish-you-were-my-financial-advisor/)

Excuses, Excuses… #2 I don’t like risk.

In continuing last month’s article “The Top Ten Excuses for Not Seeing a Financial Planner”,   here is excuse number two:  “I don’t like risk”.

To the surprise of many, risk can be useful.   Most of us only think of risk as peril or casualty.  In finance, however, there are many kinds of “risk” and understanding risk can be helpful.

For a moment, imagine that you’re on an airplane flying at 10,000 feet and standing at the door with a parachute.  You’re ready to jump, but you’re uncertain if the parachute will open.  That’s risk.  Now you go up another 10,000 feet, but you know that the parachute doesn’t work.  That’s not considered risk because the outcome is certain.  Risk means uncertainty.

As most of us have learned, we can’t predict the economy, and we sure as heck can’t predict the markets.  I’m often asked by my clients, “Jeff, where is the best place to invest my money next year?”  I have two answers to this question.  First, if I or anyone else could predict the near-term future, I’d probably have a cult following me around.  My second answer is more serious but almost always the same, “Let’s stay disciplined, goal-oriented and diversified”.

I say this because no one can predict the best returns over a one-year period. In 2012, some of the best returning asset class mutual funds for Dimensional Fund Advisors were United Kingdom small companies (36.4%), International Real Estate ( 32.54%), and Emerging Market small companies (23.09%).  Now I ask you, who on God’s green earth predicted the winners at the end of last year?  If you find that person, please tell me so I can join their cult.

Because we obviously don’t know the best performers of next year, the best thing to do is hold as many diversified asset classes (foreign, domestic, real estate, small and large companies, etc.) as possible in one portfolio. Doing so in an all stock portfolio returned about 16.5% in 2012.  Not the highest return, but certainly less risky than holding all of your stock in one asset class.

The discipline of the portfolio helps us avoid the flawed assumption that there is a trend of higher returns in last year’s best performers.  Stocks are not human; they are inanimate and do not have a memory! If we try to predict trends or invest all of our money into one company, chances are we’re going to hurt ourselves financially.

Think about it.  Diversity is good for the environment, the work place, and certainly our yoga practice. We do a diversified set of Asanas in our yoga classes. And there’s no way anyone would do handstands for 90 minutes.  Why?  That’s a good way to get hurt.  You need to diversify your yoga practice just like you need to diversify your investments to reduce the chance of getting hurt.  And that’s why you let a trusted financial planner look at your portfolio.

Next month, I’ll discuss Excuse Number Three for Not Seeing a Financial Planner:        Live for Today, Tomorrow will Take Care of Itself.

 

 

Excuses, Excuses

We all make excuses.  We make excuses for not getting enough exercise, for not going to the dentist, for not calling our mother.  The list goes on.  As a financial planner, I’ve heard a lot of excuses about money, and I know we tend to fool ourselves when it comes to our own money.  So here’s a list that I’ve come up with that David Letterman might call:

“The Top Ten Excuses for Not Seeing a Financial Planner”

  1. I just want to wait until the markets clear.” 

Volatile markets are opportunities….   It’s understandable to feel unnerved by volatile markets. But volatile markets are opportunities:  opportunities to get in and opportunities to get out. Waiting for volatility to “clear” before getting in can result in lost opportunity.  That is, you miss out on the return that might accompany the risk.  Consider this.  Since spring of 2009, we’ve been experiencing “upside volatility”.  The market has more than doubled during that time period (and sometimes it didn’t feel so good). This is the bull market that no one seemed to love!  But love it or not, it’s often too late to jump back into the market when we are comfortable.  That’s why you have a professional look at your portfolio.

In the next blog I’ll discuss excuse number two for not seeing a financial planner:  “I don’t like risk.”