5 things for every retiree to consider

I wrote a recent blog post on the basics of financial success for pro athletes. As it turns out, the basics don’t really change when we shift the focus to retirees. We still need a proper mindset and a solid structure in place in order to succeed in retirement. But what are some items for your consideration as you enter or prepare for the retirement stage? Here’s a list of 5 items that every retiree should consider:

1) Spending (income needs) and Sources of income

In my work with athletes we often talk about a Spending Plan. The concept is simple: put parameters on our spending. For athletes, this creates a structure that helps prevent spending decisions that lead to regret. Retirees should do the same thing, or at a minimum, they should be fully aware of their spending. Understanding your spending habits is vital: we have to know what we are spending in order to develop an investment plan that will generate enough income to cover that spending. I’m not going in depth on it here but any big-picture goals and objectives that require spending (or shifting of assets) should also be planned for in this step. Once you’ve put a plan around our income needs, evaluate your sources of retirement income: savings/investments, pensions, Social Security, potential part-time work, etc. For many people, savings and investments will be the bucket of money used to generate a substantial part of their retirement income.

2) Investment options

This may seem obvious but an advisor with the entire wheelhouse of investment vehicles at his or her disposal is important. Retirees and advisors across the country are all struggling to answer the same question: in today’s low interest rate environment, how do we design an investment portfolio with sufficient yield to cover our income needs? The ability to evaluate a wide range of asset classes and investment vehicles is important as we seek to find the most appropriate answer to this question for each individual client. Stocks, bonds, annuities, real estate, commodities, and insurance solutions should all be evaluated as potential components in a retiree’s portfolio. Finding the the right investments and the proper mix (allocation) to each asset class is a key part of an advisor’s job.

3) Sequence of Return Risk

OK, OK, you say… We need income and we need a mix of investments to help us generate that income. Tell me something I haven’t heard before… Fine. Let’s go into the weeds a little. But only a little, as I plan to do a stand-alone post on this topic: sequence of return risk. Simply put, sequence of return risk is the idea that not only do our investment returns matter, but the timing that we receive returns matters … and it is especially important for the person entering retirement. The basic premise of sequence of return risk is to understand that a large drawdown in a retirees portfolio early in retirement has a substantial negative affect on the ability of the portfolio to meet future income needs. Many investment pros talk about two phases of the investor’s life: Pre-retirement (accumulation) and Post-Retirement (distribution). I also add a third phase: Newly-Retired. Why? Because sequence of return risk is so important in the beginning years of retirement, I believe this life period deserves its own category that helps frame our asset allocation decisions.

4) Longevity Risk

This might be the hottest topic in retirement planning today. If it seems weird to classify living a long time as a risk, I agree. Yet, we are wise to consider the possibility that you could outlive your assets - and that is a risk indeed. Life expectancy in the U.S. for males is 76 years, for females it’s 81. But that’s not what matters as we enter retirement. The real numbers we need to look at are life expectancy for a 65 year old. And those look a bit different: a healthy 65-year old male has a life expectancy of 87 and an approximately 4 in 10 chance of reaching age 90. For a healthy 65-year old female, life expectancy is 89 and the chances of living to age 90 are closer to 50%.

All these figures tell us a story worth planning for: a longer life than many people expect.

5) Taxes

As a general rule, when making portfolio decisions I value investment performance over tax considerations. Of course, all things being equal, a good advisor will always choose the most tax-efficient investment vehicle for any particular objective. But things are not always equal. Don’t get me wrong, I don’t want my clients to pay any taxes that they aren’t required to pay. But the bottom line is that paying taxes means we made money. And that’s a good goal as an investment manager. Before I lose you, hear me clearly on this: the marriage of investment performance with minimizing the tax burden of a portfolio is where the real secret sauce lives. And that’s why taxes are on this list as an important consideration for retirees. One last note on taxes: tax risk. Namely, the risk that future taxes will be higher than current taxes. This is a risk that retirees should consider as they evaluate items such as Roth conversions, Social Security timing, and concepts like universal life insurance as a savings vehicle.

To conclude, this is certainly not meant to be an exhaustive list of considerations for retirees. But I do hope it is helpful for you as a starting point. Questions? Feel free to reach out.