I love to fly. On a clear day, flying over the green and brown quilt of the central US reminds me how much we rely on our farmers. Shiny ribbons of rivers meandering across miles, the snow of mountains gleaming bright against the rocks, and the gaping scar of the Grand Canyon are images you just can’t get on the ground. But sometimes, the view isn’t clear.
While I was flying into New York for the Independent Publishing awards, the weather was terrible. The “fasten seatbelt” sign seemed never ending as we bumped along towards LaGuardia. Below us, the clouds were unrelenting. As we descended into the city, the plane was enveloped in dark gray with drops of water skidding along the windows. The longer I was in the clouds, the more disoriented I became. Were we on course? Were we coming in too fast or too slow? LaGuardia’s runway ends in water. Missing the approach could prove disastrous, and I knew the pilot couldn’t see any better than I could.
Of course, we landed safe and sound. Why? Because the pilot knew exactly where we were going long before we got there. Everything had been entered into the computer. If that failed, he knew how to fly using instruments, and in a worse case scenario, he had a support team at the airport who could provide him with guidance.
Creating a retirement plan is very similar to what the pilot completed prior to his trip through the rain and low-hanging clouds. Most of the work in saving for retirement occurs long before we complete our last day at the office. We should calculate how much money we will likely spend, what portfolio returns are reasonable, and how much we need to save to meet these goals. Of course, planning can’t assume everything will be sunny. That’s why it’s important to create scenarios with potentially different assumptions. That way, if it’s financially “raining” the day we retire, we’re still okay.
Some of the biggest errors I see people make around retirement planning involve not creating the big picture—the financial cost of no longer working. Some people have no idea how much they will spend during retirement. For that matter, they don’t even know what they are spending today! Too often, people don’t save enough or use rules of thumb that might not be accurate. Have you ever heard you will need 80% of your current income during retirement? Here’s my warning—I have no idea if you will reduce your current spending by 20%. You might spend more, or maybe even less. Instead of taking an easy way out, create a spending level based on your retirement goals using today’s cash flow as a guide.
Portfolio assumptions are also part of the big picture. Many people assume optimistic investment returns that might not be realistic given their risk tolerance or just market conditions. Chasing hot stocks isn’t the same as looking at realistic long-term results. In fact, trendy investments can actually work against you if you get caught up in bubbles and speculation. In general, creating a diversified portfolio of low-cost funds leads to more successful performance. Additionally, be careful that your risk tolerance level and your return assumptions are coordinated. If you are conservative, you can’t anticipate a year-over-year 9% return. And don’t forget about the impact of inflation.
Finally, use your spending and return assumptions to create a savings plan. If you discover you aren’t quite on track, try to save a little more or consider delaying retirement for a few years. You don’t want to adjust your risk tolerance level dramatically, but you might tweak it a bit, assuming you are still comfortable with the new level of risk you have created.
Having set a reasonable course, now just follow through with your plan. Exactly how you choose to implement it is up to you. Just be sure you understand the components, and ask your financial planner how all the pieces fit together. You should also periodically revisit your assumptions to be sure they are still valid and will lead to your financial success.
With your plan in place, when there are storms on the stock market horizon or other events that can limit your ability to see clearly, you know you are probably still on track. As you transition from working to retirement, you don’t have to be afraid, even if clouds are blocking your view and rain is streaming down your windshield.
