Many retirees have been able to reduce the risk of running out of money, without having to lower their lifestyle.
Jerry Seinfeld once quipped that the fear of dying was ranked second to the fear of public speaking. “This means that at a funeral,” he said, “most people would rather be in the casket than giving the eulogy!”
But fears tend to shift as people age. For instance, according to a recent study of retirees, the #1 cited retirement fear is running out of money before they pass away. As a result, many retirees just decrease their lifestyle to avoid this risk. However, it may be possible to reduce the risk of running out of money, without having to lower your lifestyle. And if you have successfully saved for retirement, you probably already have the experience needed to create a plan to reduce this and other retirement risks without reducing your expectations for an enjoyable retirement.
An enjoyable retirement is not only for the very wealthy.
Those with considerable wealth can, of course, enjoy a comfortable lifestyle without much worry. However, an enjoyable retirement is not only for the very wealthy. Middle-class Americans can also achieve this goal, including traveling, giving to grandkids and charities, and living retirement as they imagined it would be. We can learn this strategy from the rare (and becoming rarer by the day) group of middle and upper middle-class retirees that do not feel the pinch to cut back on spending because they have retirement income sources such as pensions . They enjoy fixed income that helps to keep their lifestyle active and full.
Time Magazine highlighted this fact. It noted that a 2012 BlackRock Retirement Survey said that retirees with pensions and a guaranteed income stream are “far more confident” about their finances in retirement.
Surveys have found that those with a guranteed income stream are happier.
It further noted that other surveys have found that those with a guaranteed income stream are happier, too. “One study found that retirees with a traditional pension are more content than those with the same level of wealth but no pension, and that retirees who have both a pension and a 401(k) are even happier.”
Today, less and less Americans are retiring with a pension. Most Americans, instead, have a 401(k) or another lump sum of savings. This leaves the burden on retirees to create an income plan for themselves.
Why did many employers swap these defined benefit pensions for defined contribution plans such as 401(k)s?
The shift from pensions to savings has created new challenges for retirees.
Cost is one reason:
“Because defined benefit plans are more costly for employers than defined contribution plans, most of them have – you guessed it – scaled back dramatically or eliminated these plans altogether in recent years. If you still have a defined benefit plan at your company, consider yourself lucky.”
The shift from pensions to savings has created new challenges for retirees. It is important to look at the obstacles you may personally be facing as a result of dealing with a lump sum instead of income in the form of a pension. These hurdles may be affecting your strategy.
Trying to pay for monthly expenses from a lump sum is more complex.
Shifting away from pensions saves companies money, but it makes planning for retirement more complicated. Instead of choosing simple income options in a pension, retirees have been left to manage their savings.
Unless you were born with a fortune in the bank, you probably managed your family budget your whole life based on monthly income, not based on a large sum of money.
This fixed-income-and-expenses budgeting is not easy, but it is much more straightforward. Trying to pay for monthly expenses from a lump sum of money is more complex.
For example, consider this question: can you afford a golf membership if you have $300 a month of extra income?
That is a straightforward decision. Now ask this instead: can you afford a golf membership if you have $500,000 that needs to last your whole retirement? That is much more complicated.
Being forced to create income using withdrawals from savings is much more involved.
That is one reason that people with pensions are happier in retirement than those with an equal amount of assets, as Tom Hegna, author of “Don’t Worry, Retire Happy” and Heyday Retirement contributor states in his workshop.
People living from savings may be tempted to reduce their travel plans, while retirees with guaranteed income can take the trip without financial worry. They have planned for it.
The bottom line: being forced to create income using withdrawals from savings is much more involved, resulting in a new retirement planning challenge that many of the "pension generation" never had to face.
The absence of an income strategy has caused longevity to be a risk instead of a reward.
It would be simple to plan our retirement income if we knew how long we would live. But we don’t know if retirement will last ten years or 30. Another Heyday contributor, Wharton Finance Professor Emeritus Dr. David Babbel, explains this in his workshop. Frugal retirees tend to underspend and under-live their savings, just in case they live longer.
We should be celebrating good health and a long, happy retirement. However, the absence of an income strategy has caused longevity to be a risk instead of a reward. The good news is that this risk can be insured.
"How do I decide whether to cut back?"
No matter how much money we have in the bank, if we lose our salary, we tend to tighten up our spending. When we retire with a defined contribution plan instead of a pension, we have effectively stopped getting an income. No matter how much we have saved in our contribution plan, the loss of a regular paycheck will usually trigger a reaction to decrease spending - whether it's necessary or not.
The three general risks of more complexity, longevity multiplier and loss of income we identified above might translate into planning concerns like this:
1. How do I decide whether to cut back on “fun money” spending?
2. How long should I plan on making my lump sum last?
3. Should I consider working longer or getting secondary income, so I don’t have to erode my lump sum?
Start by addressing your personal concerns and risks.
However, each retiree is unique and faces additional risks that are unique to their situation. These more personal risks should be tackled first, before general risks.
Determining Your Concerns and Risks
Over 15 years of working with hundreds of retirees, we have found that the most practical way to create retirement income plans is to start by addressing the concerns and risks of the individual retiree. Many people start planning based on retirement goals. We have found that addressing concerns first will clear the way to plan for goals. Many times it even raises the bar and allows people to live a fuller retirement than they thought possible.
List your top four concerns, in order of priority.
To do this, start by thinking of the top four retirement concerns that bother you the most, and list them here in order of priority.
We have seen many different concerns from retirees. Some examples include:
1. I’m nervous about health care costs in retirement. How much should I plan on spending annually?
2. I’m just not sure that I’ve saved enough. How can I be sure that my money will last?
3. My income isn’t quite enough to cover my projected expenses. Should I get a part-time job?
4. I’ve heard some critical things about annuities, but I’m not comfortable with having my money at risk. What other strategies should I consider?
5. I’m an aggressive investor, but my spouse is more conservative. What are the best strategies for meeting both of our objectives?
Each retiree has personal risks to address.
In the note section at the bottom of this page, list your top four retirement concerns. Spend some time thinking about this list, and talk it over with your spouse if you are married. You may come up with many more than four concerns - list all of them, then prioritize the list until you have determined your top four. Make sure to take the time to think them over, and prioritize them with the most pressing issues at the top.
"How can I be sure that I'm asking the right questions?"
Once you have defined these unique risks, the path towards your own strategy will start to come together. Based on your unique concerns, Heyday will recommend the next steps. This may be an online workshop, a local, in-person workshop we recommend attending, or a phone call with a financial representative from Heyday. Your unique concerns will form the foundation for the plan that addresses them.
Some people's first concern is, "How can I be sure that I’m asking the right questions?" Feel free to add that to the top of the list, or add it as your only concern, and a Heyday representative will reach out to work with you in person.
Organize your lump sum into monthly income and expenses.
You Already Have the Know-How to Fix It
If you have saved during your working years, rest assured: you can create a personal strategy that can help reduce your concerns without reducing your lifestyle. While retirement has gotten more complex as a result of the reduction of defined benefit pensions, you can take back control and create for yourself a clear, straightforward strategy.
How? Saving for retirement using an income-and-expenses model gives you the know-how to create a plan that works for you. You have built up all the knowledge you need.
The secret will be in managing your money in the way in which you have succeeded already - organizing it by monthly income and monthly expenses. By thinking of your money not as a lump sum, but as a monthly income, you will naturally be harnessing the skill of which you are a seasoned veteran.
You may not have to decrease your lifestyle in retirement.
Creating your secured income plan can help ensure that you don’t have to decrease your lifestyle in retirement. You are taking the first step by addressing your risks and concerns. Make sure to take the time to think them over, and prioritize them with the most pressing issues at the top.
