As we have written in past articles, the most important question that those approaching, or already in, retirement want to have answered is “Am I OK?”.
I met Melody for the first time last week. At 63 years of age, and single, she wanted to ensure that she was fully prepared for retirement. She asked me to review her financial situation and to assess her retirement readiness. She had gone through a traditional retirement plan with her current investment advisor but was not sure it was “correct”, and was looking for confirmation.
Melody reached out to us because a friend of hers had gone through our Retirement VIEW process and had recommended that she consider doing the same.
After being asked a series of financial questions, such as how much she thought she might spend, Melody was told that she should not worry – that she would be fine in retirement.
So why was Melody worried?
Through our conversation together, it became clear that she inherently recognized this process was too simplistic and did not account for the unpredictability of retirement life or the unpredictability of markets. The 20-page report she was given made many broad and simplistic assumptions.
In the financial planning world, we have been given templates to help our clients relate their retirement spending to pre-retirement income. In the late 90’s, the assumption was that you would need 70% of your pre-retirement income. The rationale was that you would spend less and pay less in taxes, so you would need less gross income. Over time, the answer evolved to include ranges from 70% to over 100%, as people realized that depending on individual retirement lifestyles, one could end up spending as much – and sometimes even more – than they did before retirement. The issue with all these approaches is that spending in retirement is not linear.
Think of the spending phases in retirement.
Retirees spend differently in different phases of retirement.
The most expensive time in retirement is often the first couple of years. In the transition to retirement, many might spend on travel and new experiences. They might also set up their next few years by redoing their roof, buying a new car or replacing their patio. They try out and invest in different hobbies, as they realize that occasional enjoyment of an activity does not always translate into daily enjoyment of the same activity.
Contrast this first phase to a later phase, where you are healthy enough to be living independently but are not travelling, spending, or dining out as much. Expenses in this phase can be significantly lower.
Be realistic.
The key to answering how much income you need in retirement is to fully understand your expenses – to codify them as basic, discretionary or luxury, and to appreciate how they could change in retirement. This requires deeper exploration in how you personally visualize retirement. Most importantly, this reality demands a plan that remains flexible and can be adjusted when markets or life is unpredictable and throws you a curve ball.
Melody is not alone in finding herself dissatisfied with a retirement plan that is overly simplistic that cannot dynamically adjust based on her retirement reality. We look forward to working with her.
At Tall Oak Private Wealth, we help clients who are preparing for retirement by helping them visualize their individual Retirement VIEW. Once we have drawn a clearer picture of retirement, we can then help retirees understand their financial readiness and answer the most important question they face throughout retirement: “Am I OK?”
At Tall Oak Private Wealth, we look forward to continuing conversations with you as we help you in planning your retirement.
The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.
