Retirement expert reconsiders previous thinking
Most planning advice, both regarding saving for, and the enjoyment of, retirement, is given by people who are not retired. So, while the advice may be well meaning, it could inadvertently suffer from a lack of empathy with the realities of retirement.
In addition, the experience and expectations of current and previous retirees may differ significantly from that of the vast numbers of baby boomers that will increasingly dominate the ranks of the retirees over the next decade. As a result, retirement advice based on researching earlier generations may not be as relevant as desired.
A recent article in “The New York Times”, titled “Three Things I Should Have Said About Retirement Planning”, touches on the above issues. It is a confession by Paul B. Brown, who co-authored two books on saving for retirement in his 30s and 40s and is now aged over 60, that his typical advice suffered some inadequacies, now made apparent by his own life experience.
He provides three examples where his fairly generic approach to retirement planning failed to accord with the reality he experienced. The remainder of this article discusses Brown’s examples, together with some commentary on how we respond to the issues raised.
Generic retirement planning meets reality
The first example concerns a typical response to inadequate retirement savings. Rather than suggest to a client that they need to save more/spend less, the more palatable advice is often to suggest they work longer. Together with the fact that we are, on average, living longer, working longer doesn’t appear an unreasonable proposition.
The obvious argument against this for those in labour intensive jobs is they may be physically incapable of working longer. But Brown’s experience is consistent with that of a number of our clients:
“… I now realize … just how hard it is to keep working as you age. My job doesn’t require much more than typing all day long, and I find myself getting fairly tired by day’s end. I can’t imagine I am going to have more energy a decade from now.”
So, unless you remain extremely passionate about your work, working longer to rectify an inadequate savings problem isn’t necessarily the easy option that it is often held out to be. If our clients are to work beyond a desired retirement age, we prefer it to be by choice, rather than driven by financial necessity.
Brown’s second example concerns an assumption that “life moves in straight lines” e.g. “once you begin saving, you keep saving”. His earlier advice assumed that once children moved out of home and were financially self-sufficient, the money previously directed to children would then all be available for retirement savings.
His reality was that for some considerable time those “available” funds went to home repair that had been deferred during the high cost years of raising and educating children. His planning advice had not allowed for the significant and ongoing cost of what we call “capital maintenance”. In our view, Brown’s previous planning advice failed to sufficiently drill down into the financial expectations of his clients (and/or book purchasers).
This is supported by the third example, where his personal experience included a large once-off expense for a combined major trip/wedding that had not been contemplated and, apparently, seriously affected the family’s financial position. It underlines the need to budget for future desired ongoing holidays and other major, highly likely, expenses (e.g. weddings, support for adult children), so that should a large unplanned once-off expense occur it does not cause an entire financial plan to unravel.
“Rules of thumb” solutions may not be helpful
Brown’s solution to the conflict between his previous advice and his actual experience:
“And no matter how much money you think you are going to need, save another 15 percent, just in case”.
Unfortunately, we think this advice will also fail to adequately handle reality. In our view, there is no substitute for:
• A detailed examination of the financial implications of a client’s lifestyle expectations; and
• Regular review (in our case, annually) of the resulting lifelong cash flows, given that changes will inevitably occur.
Short cuts will likely leave you short changed.
The actual experience of a do-it-yourselfer accountant, who sought a second opinion from us regarding the veracity of his financial planning, is salutary. He planned to retire within two years and, among other things, estimated a desired retirement lifestyle of $120,000 p.a.
A more thorough analysis of his expected spending and incorporation of an overlooked allowance for capital maintenance (of a principal residence, holiday house, investment property and two luxury cars) suggested that $200,000 p.a. was an agreed, more realistic, assessment. An additional 67% retirement capital requirement, and/or a dramatic change in lifestyle expectations, was indicated – “save another 15 percent” would have been a wholly inadequate remedy.
We accept that the future is unpredictable. Also, we know that your view of a desired lifestyle for a time that is many years ahead may change by the time you get there. But not making some reasonable guesses about all aspects of your desired future and regularly reviewing those guesses makes it almost certain that unplanned adjustments, most likely significant, will be needed at some stage.
Originally published by Wealth Foundations