By Daniel Goodwin
As I get deeper and deeper delving into the financial picture of clients in the 30’s, 40’s, and 50’s, the psychology behind how people think about retirement is truly fascinating. I’ve said before in national magazines that we should really ‘retire’ the word retirement as it doesn’t mean much anymore with the changing landscape of work, family, and the economy. In fact, there was a recent study done in the USA Today (www.usatoday.com) that suggested 68% of the individuals working today said they would continue to work into retirement.
It’s been discussed overtly in the media that we should all concentrate on a philosophy of ‘what’s my number’ when it comes to planning your grand exit to make work optional down the road. This financial planning notion centers on the concept of figuring how essentially how much money you will need in the bank at the day you stop working to continue to provide you with enough income for the rest of your life. It’s the number you need so you will never run out of money. I’m convinced at this point that this type of planning is severely flawed. If you plan out the number your need in the bank for retirement and actually hit it, you will have put yourself in a corner that will lead to you eventually becoming quasi paranoid as you age through retirement.
The answer we should be searching for is “what’s my paycheck” and not “what’s my number” where I take a very different fork in the road. Think about this for a minute. You work really hard and begin to earn more and more income as you grow your career. You actually have a modicum of success and save the maximum in your 401(k) plan, take the company match, and get showered with stock options for twenty to thirty years. You invest your money wisely and achieve a reasonable rate of return on the money. Your financial advisor runs a detailed analysis and now you have a goal of $2,000,000. They tell you upon hitting that $2,000,000 that you will never run out of money if you use a certain withdrawal rate, earn a certain interest rate, and the variable assumptions like inflation and tax rates stay in line.
What’s wrong with this analysis? The item that nobody discusses is that by achieving this level of success, you are guaranteed to spend down your money. So what happens psychologically is that the first few years of retirement you hit a sensation of jubilation. You actually spend more money than you would in normal years living out some of your “to do” bucket list. After you come down to planet Earth from your couple of years of travel and vacation, you start to withdraw money at the reasonable spend down rate. The problem is that when people spend their lives building up a capital base, emotionally is makes them sick to their stomach to see their balances of the investment accounts go down. While intellectually they understand that this money was built up for this very purpose, it is impossible for them to sit by idly and watch the capital base dissipate that they spent their whole lives building up. This is why you’ll often hear that people who have a lot of money are often some of the cheapest people in the world. The reason is the massive fear of this treasured money slipping out of their hands.
So what do most of the retirees do when this phenomenon starts to hit them when the investment statements come in the mail? You got it, they begin to shrink their lifestyle to the point that the investment account balances wont’ go down. This is actually counter intuitive to what should be happening. You build up this capital base so you can enjoy your golden years doing anything that you want to do. Instead, people become frantically miserable thinking every single month that they are going to run out of money. Who would have thought that the success of hitting ‘what’s my number’ could actually be devastating when you opt to retire down the road.
This is why for those of you in your 30’s, 40’s, and 50’s who are planning now for retirement should understand that the discussion should be around ‘what’s my paycheck’ and not ‘what’s my number’. The happiest people I have seen throughout my career in retirement are teachers, government workers, and clients who receive steady pensions from their former employers. They don’t think emotionally as much about the market, the economy, or the Government around their future. All they know is that a check comes in the mail each month. This means as you plan your family finances, you should have a really strong consideration on what percentage of your assets that you set up to give you a real pension like paycheck in retirement. There are many types of products that can solve this part of the equation and you should ask your financial advisor about how these types of instruments work within the framework of your whole plan.
If I asked you today this question, “if you had 3 million dollars in the bank when you retire, do you think you would be happy?” Most of you would unequivocally say yes, but 10 years into retirement you would discover that your emotions would take over and you would be fretting about your capital base every single day. Think about the new notion of retirement being about a paycheck and not just a lump sum. If you knew the check was in the mail every month, how much fun could you have and not worry about the ups and downs of the market every day. Isn’t it time you figured out what your paycheck should be in retirement? Today we have the ability to structure self-funded pensions that provide for principal protection AND guaranteed lifetime income.