Get Long-Term Smart® About Your Retirement
Gregory Salsbury, Ph.D.
Whether you know it, when you’re thinking long-term smart, you’re addressing the four challenges that must be taken into consideration if you’re going to enjoy a comfortable retirement. They are longevity, inflation, volatility, and your very own expectations about retirement. Brought together, these four components bring us an acronym that reads LIVE.
The L in LIVE is for Longevity. After college football legend Paul “Bear” Bryant coached his final game, a reporter from the Washington Post asked the coach what he planned to do in retirement. “I imagine I’ll go straight to the graveyard,” replied Bear sarcastically in his trademark gravelly southern drawl.1 He was wrong: His retirement lasted about four weeks before he died of a heart attack.2 Chances are your retirement will last longer than Bear Bryant’s did...a lot longer. The fact is there’s a 72% chance today that one member of a 65-year-old couple will reach the age of 85.3 The good news is that improvements in nutrition, healthcare, and medical technology have led to tremendous breakthroughs in people’s health, spiking longevity. The bad news is that global aging may well become as big a threat as global warming. At “Longevity 5,” a 2009 international conference on aging, economists, actuaries, bankers, insurance executives, and aging experts concluded, among other things, that longevity risk could bankrupt social insurance programs. David Blake of the Pension Institute at the Cass Business School in London and the chairman of the conference said, “Economists have not really understood this risk and policyholders are not yet engaged.”
The point is, you are on your own, and you should get personally engaged and prepared for a long retirement. Don’t assume the government, a company pension, or even your family will bail you out. You certainly don’t want to be a healthy, happy 90-year-old who finishes up his morning run by stepping up to the ATM and getting an Insufficient Funds notice. How will you ever pay for your vitamin-charged mango smoothie? You want a retirement that’s as worry free as it can be from a financial perspective, and that’s why it’s important to work with your advisor to help make sure you have income as long as you live.
The I in LIVE is for Inflation. No matter how long you’re around, one thing that will be around with you is inflation. Inflation is the invisible tax that’s levied on every purchase as time goes on; it steals the purchasing power of each dollar, which is especially dangerous to a senior citizen living on a fixed income. What may have been a comfortable retirement income ten years ago is today squeezed by inflation because that money doesn’t buy nearly as much as it did in the late ’90s.
Inflation is like compounding interest in reverse and has averaged 4.6% since 1965,4 which means that an investment that’s yielded 4.6% over the past four decades will leave you with enough money to buy exactly as much as it did then. Inflation makes every dollar worth less than it once was worth; it is to your retirement nest egg what kryptonite is to Superman’s ability to leap tall buildings in a single bound.
Think about gasoline prices. In recent years, gas prices have gone up and down. When gas costs more, it isn’t any better and it doesn’t make you go any farther. It just bites into your budget more than it once did. What’s worse is that inflation makes other products that are reliant upon gasoline more expensive. Even low rates of inflation can be highly destructive to a retirement plan, and there’s not really anything that an individual investor can do to defeat it. Therefore, it’s important to make sure that the reality of inflation is a consideration in any retirement plan—like allocating a portion of your portfolio to help maintain the type of investments that can help you outpace inflation.
The V in LIVE is for Volatility. The stock market has historically produced average annual returns significantly higher than most fixed income asset categories. But the problem is that this performance comes with some significant ups and downs, strings of both good and bad years—and who can imagine anything worse than what we just went through? It’s important to talk to your adviser about finding ways to plan for your financial future that can help minimize the effects of volatility to help ensure that your money will last as long as you do.
The E in LIVE is for Expectations. Finally, most people have expectations about the lifestyle they want to have in retirement. Since the Meltdown of 2008, some of the high-flying expectations of Boomer Nation have been grounded, but have we learned enough lessons from the fall? From an article in USA Today, published October 8, 2009, titled “Being jobless for six months ‘grinds on you,’” a 43-year-old construction worker who had lost his job and his home in recent years and barely had enough food in the refrigerator to feed his family of four, was being interviewed.5 As he talked to the reporter, it was observed that his 13-year-old daughter was curled up on the couch texting a friend on her cell phone. Now it is tragic that so many workers have been devastated by record unemployment, but a visual of an empty fridge juxtaposed against the cell phone-equipped tween on the couch could be the movie poster for America’s nightmare on Main Street. Clearly, the lessons to be learned from 2008’s economic spiral will be harder for some than others. Shaping expectations for retirement should start with reality, not a dream. And a well-constructed retirement plan is a lifelong commitment.
The American Dream: Rethought
In the span of a single generation, the American nightmare that was the Great Depression turned into the American Dream. It was an amazing cultural transformation. One generation experienced widespread unemployment, soup lines, and severe doubts about the future of America and its economic system. The next generation grew up in single-family houses that their parents were in the process of owning; they ate three square meals a day and went to sock hops on Saturday nights. An entire generation learned that things were always getting better. “New and improved” became a part of the American lexicon as every year brought something new for every product, and the old products went hurtling toward obsolescence.
With the notable exception of the ’70s, the American economy has grown almost continually since the end of World War II. Products and services became more effective, and the lives of Americans from coast to coast were improved with each new invention, patent, and upgrade. Houses increased in size and square footage as features that were once considered luxuries, such as granite countertops, Jacuzzi tubs, and media rooms, became default items for many homebuilders. Car buyers were basing their decisions on how many cup holders a certain vehicle had, and people were shelling out hundreds of dollars to put their tweens in the front rows of the latest boy band concerts. Money was easy, credit was easier, and life was good. Or so we thought.
This same underprepared, overspent, and poorly behaved generation is hurtling toward retirement—kicking, screaming, denying, and determined to reinvent reality. Yes, even before the Meltdown of 2008, Boomers were unprepared for retirement. We all get it. But the good news is that 81% of Boomers say the meltdown will cause a major shift in their financial behavior in how they manage their investments and behave with their money.6 The question is, “What will that effect be?” And the more important question is, “What will you do next?”
Now that you have a better understanding of the way your mind works with your money, you may be better prepared to apply that insight to the way you approach retirement planning. Here are ten top-of-mind takeaways for improving your Retirementology IQ.
Top Ten Lessons for Retirementology
1. Prudent financial behavior means being aware of the psychological financial traps.
2. We are in the midst of the worst financial crisis most Americans have ever seen—and it may get worse.
3. Unrealistic lifestyle expectations make a happy retirement impossible.
4. Retirement isn’t a singular event—spending in your 20s, 30s, and 70s has an impact on your retirement. Further, retirement isn’t isolated—what you spend on a vacation or a car may impact your retirement later.
5. Retirement isn’t a zone; it’s a continuum—one you need to start thinking about much sooner than five years out.
6. Your home is not a retirement account.
7. Financial support decisions for extended families will move front and center and will have an impact on your retirement.
8. Although historically it has always been part of the mix, taxation is emerging as the single largest financial challenge for the affluent.7
9. Healthcare policy and expense will have the potential to sabotage your retirement plan.
10. Your adviser can help you with the emotions and complexity that muddy the retirement waters.
Planning for retirement is a complicated, lifelong commitment; there are no shortcuts or one-size-fits-all solutions. A once-in-a-generation financial meltdown does have a dramatic way of magnifying the need and urgency for a new way of thinking, so approach retirement as a process rather than a vision. This will better prepare you to meet the challenges that no previous generation has had to face before. You can take the first step in Retirementology by making a few small changes in your perspective, behavior, and habits in earning, spending, saving, borrowing, and investing. Over time, these small changes may make a big difference in determining how you define retirement and spend your Golden Years.
Endnotes
1 The Victoria Advocate, “Heart Attack Claims Coaching Legend,” January 25, 1983.
2 The Victoria Advocate, “Heart Attack Claims Coaching Legend,” January 25, 1983.
3 Employee Benefit Research Institute, July 2005; Society of Actuaries, 2000 Mortality Table.
4 InflationData.com, “Historical US Inflation Rate 1914–Present,” 2009.
5 USA Today, “Being jobless for 6 months or more ‘grinds on you,’” October 7, 2009.
6 MetLife, “The 2009 MetLife Study of the American Dream,” study conducted January 7–16, 2009.
7 Investment Advisor, “Even Affluent Clients Feel the Chill,” October 1, 2008.