Be a retirement control freak

Google “what can I control?” and you will be directed to a host of touchy-feely websites that list all the ways you can control your health, what you eat, your breath, how you treat people, something called “self-talk,” the books you read, the number of times a day that you smile, and the general direction of your life.  There are so many things about our daily life that we can control—on a personal level.  But there’s not much we can do about outside forces.  For example, you may wake up and practice yoga, then grab a healthy green juice and pay for the coffee of the guy behind you in line (pay it forward-good karma!), but there’s little you can do to prevent your car from getting side-swiped in the parking lot, the market losing 300 points and getting downsized from your job.  

Good health habits and an awesome attitude can’t necessarily stop these life events from happening.  Sometimes, life just happens.  But to the extent that we can control our behavior, how we react to the good and the bad, and what we do to prevent or prepare for certain life events, that can make all the difference in the world.

When it comes to planning for retirement, an important and possibly lengthy time in our lives, there are some factors over which we have absolutely no control, some factors we have limited control over, and some factors which we can control.  It’s important to work with a financial advisor and to develop a workable plan that takes into consideration all of these factors and how to take action on each.

No control

Social Security. One aspect of retirement planning that troubles most of us is whether Social Security will be around when we retire. The truth is that individuals have very little control over the future of Social Security; we can vote for the politicians and officials who we think may make the changes we hope for, but beyond the power of the vote, there is little we can do to influence or change policy.  The best we can do is understand and anticipate changes and factor these changes into our financial plans.

Government policies. Similarly, we have no control over government policies such as future tax rates and inflation, both of which have a significant impact on retirees.  Tax rates are important because many retirees derive a significant part of their retirement income from retirement accounts and distributions from these accounts are taxed at current income tax rates.  When tax rates go up, this can affect the amount of after-tax income a retiree is left with.  Inflation is important as well since it affects your purchasing power.  A dollar twenty years ago could buy more than a dollar today and a dollar in twenty years can buy even less.  How much less really depends on the rate of inflation. That is why it’s important to add diversification to a retirement portfolio in order to achieve the long-term returns needed to fund retirement.

Market returns.  Investing in the market can be scary and definitely comes with risks; however, diversification and long-term investing can offer great rewards.  Remember, we can’t control how the market will act on a day-to-day basis; but we can control how we react to these changes.

Some control

How long we live. The average couple at age 65 today has almost a 50% chance that one of them will love to at least age 90.   While family health history—which we can’t control-- plays a big factor in life expectancy, it’s not everything.  Health habits including diet, activity level, smoking and mental health are also extremely important.  In addition, studies show that the higher education level an individual achieves, the more likely she’ll be employed and the higher the income.  Higher education/income correlates with longevity.  

Retirement date. As much as people are always dreaming up ways to ‘retire early’ the truth is that more people are working later in life, and the main is reason is because they want to work.  However, while we have been seeing an uptick in the number of people continuing to work into their later years, the average age of retirement continues to be age 62 (EBRI).  Many people plan to retire at age 65 or later, but are forced to retire earlier than planned, mainly due to health issues.  If you are planning to retire later, make that part of your retirement plan, but don’t count on the income to BE the plan.

Life events.  Sometimes bad things happen to good people (and sometimes good things happen to bad people).  Regardless, it’s important to anticipate certain life events—like divorce, early death of spouse, the loss of a job, extended illness of yourself or a family member-- but not to allow them to derail retirement.  

Total control

When to start saving and saving rate.  The biggest regrets that retirees report is that they wish they had started saving sooner and that they had saved more of their paycheck.  One of the best ways to save for retirement is to save in a retirement account.  If you have access to a 401(k) or other employer-sponsored retirement plan, consider participating in the plan or increasing your savings rate if already contributing.  The pre-tax contributions grow tax-deferred until you start retirement distributions, maximizing your savings.

Spending habits. During working years, we tend to establish spending habits based on our needs and lifestyle, current income and savings, and with the expectation that our income could grow as our career progresses. Once in retirement, however, we must adjust to a fixed income and finite savings.  Depending on your pre-retirement lifestyle, you could see a big drop in spending as work and family-related spending declines.  In other cases, you may see little change in retirement spending and eventually need more income due to health care costs.  Establishing disciplined spending habits and being aware of how spending will change in retirement is key to a solid plan.

Diversification and investing.  Once in retirement, many retirees become very conservative, look for income-oriented opportunities and think twice before making changes or taking on more risk in their portfolios.  Many people could spend 25, 30 or more years in retirement and with longer life expectancy comes the need to structure your portfolio accordingly.  

Withdrawal rate. Once in retirement, it’s important to set a consistent withdrawal rate that will provide you with income sufficient to meet your day-to-day needs and maybe a little extra for your bucket list. Many advisors followed the 4% rule which set an initial 4% withdrawal rate from your portfolio and then makes inflation adjustments along the way.  Other retirees are uncomfortable pulling from principal and aim to use income only to meet their needs.  In setting a withdrawal rate strategy, individuals should consider market returns, wealth level, age, risk tolerance and annual spending needs. 

Like death and taxes, there are certain things in retirement planning that are certain.  Working with a financial advisor and establishing a plan can help you prepare for those events over which you have no control, anticipate the unexpected and make the best of what you can control.