Wealth Skills

Is your retirement at risk?

Posted on 26 November 2009

Recently Yahoo Finance posted an article by Emily Brandon “4 Reasons Your Retirement Is at Risk.”  Based on new analysis from the Center for Retirement Research at Boston College she quotes 4 reasons why Americans will have to significantly cut their expenses when they leave the workforce at age 65–or they will have to delay retirement.

The four reasons are:

• Housing market decline – lower value of homes, which translates to lower equity
• Stock market slump – exposure to stock market investments in defined contribution pensions (employer contributes certain amount each month but the future value of pension and distribution amounts in retirement are uncertain) vs. “traditional,” defined benefit pensions (set amount of distribution)
• Lower interest rates – less income from investment
• Reduced Social Security – availability of full SS benefits are being delayed each year, meaning you have to be older to qualify for the full benefit

Reading this article is just simply depressing. It seems that the only option we have is to cut our spending or work longer, maybe never retire. Life just isn’t going to be good!

In reality, all that this study does is project the current economic circumstance onto the future. What this article and we as human beings frequently fail to recognize is that future circumstances will be different than current circumstances and we do not know what these circumstance are actually going to be. Unless you are already retired, the reality of economic circumstances in which you and I will retire will be different from those we are experiencing today. So stop worrying about what those circumstances are going to be and take actions that will give you the retirement you want no matter what the circumstance.

What actions can you take to prepare for your retirement, at the age you want to retire? And what will immunize you to whatever circumstance may prevail at or after your retirement?

• Housing market:

Plan to have a house paid off by the time you plan to retire and have other sources of retirement income so you don’t rely on home equity in your house for living expenses. Then the change in price of your home does not impact how your day-to-day life goes.

• Stock market:

Have diversified investments in which equity (any more volatile investments) represent progressively smaller portions of your overall assets the closer you get to retirement.

• Interest rates:

Your income from savings and bond investments will vary. No matter what the interest rates are today they will be different at the time of your retirement and will continue to change after you have retired.
Structure your living expenses in retirement to total less than 100% of your retirement income, maximum of 90% of your planned retirement income. This will allow you to maintain your lifestyle during the periods when the interest you earn is lower then anticipated (or average).

• Social Security:

Have multiple sources of retirement income. Take actions today so that the Social Security check is not your only source of income during retirement. The more sources of income you have in retirement and the more they vary by type, the more immune you will be to the changes in circumstances.
Here are some potential sources of income in retirement:
o Social Security,
o Interest earned on investments (income from cash savings, bonds, and dividends from stock investments),
o Income from rental property (no mortgage on rental property),
o Distributions from retirement accounts (pension, 401K, IRA) which are mandatory after age of 70 1/2.
And there are other potential sources of income to consider: income from annuities, direct lending or investment in privately held companies, commercial Real Estate, etc.

Having said that, many retirees today rely on social security as their primary or only source of income and many of them are content with their life and financial situation. We talk about changing lifestyle as if it was something unwanted or undesired. And it seems implicit that we will want more in the future than we want today (thus the concern about cutting expenses).

Today, I am in my forties. What I value, want and lifestyle I have is very different than when I was in my twenties. I look at my mom who is 75. What she wants and values in life today is very different than what she wanted and valued in her forties. Our lifestyle changes as we get older. It just does. Why would we insist that it’d be the same?
I already want less for myself than I wanted in my twenties. My contentment in life is far less dependent on money or things than it was twenty or ten years ago. I sense that this trend will continue. And I prepare and take steps today to have the retirement I want. You can do the same.

Have fun planning for retirement you desire and take actions consistent with your plan. Circumstances change and you can manage to have the life you want today and in the future.