From the moment we start working or got into business, retirement planning process has been, more often than not, intentionally oversimplified so that we don’t get distracted by unnecessary information that might divert or delay accomplishing the most important tasks – such as setting a automated savings”system” to accumulate wealth and increasing financial intelligence. In other words, it is about building a solid foundation of good financial habits.
If you have 10 years or less to retirement – now it is time to up the ante because you can literally “smell” your retirement. Bear in mind that in this stage, an individual has a limited number of years remaining to adjust for any errors or shortfalls.
It’s time to take retirement planning seriously and dig into the details. You’re getting close enough that time is running short.
Any critical adjustments must be made now while there is still sufficient time to change course.
Stage 1: Early Phase: Still can change course
- Solidify your retirement vision with your partner: Grab your favorite bottle of poison, relax and have an open discussion on your dreams for retirement. You want to answer the “what, where, and when” questions.Where do you want to live? What do you want to do? When do you want to do it? This is imperative because they determine “how much” your retirement will cost. Realistically, in the early period of retirement when you are active and traveling will be very different from late stage retirement. You may even still work a few hours per week – freelancing consulting and stuff, so do allocate this into your vision too.
- Create A More Accurate Ballpark Estimate: Once your dream for retirement starts taking shape you can then sharpen your pencil when estimating “how much” assets and income you will need to retire securely. It is time to tighten up your budget estimate and determine if your assets are on track or lagging behind.
- Consider Paying Down The Mortgage: If your savings is on track and there is a surplus then ponder over settling your mortgage. It not only does it pars down your monthly income needs but your home now is protected against debts and financial obligations. You’ll probably feel more secure and sleep better at night when you own their home encumbrance-free.
- Don’t think twice about settling Bad Debt: Bad debts aka consumer debts including hire purchase and credit card outstanding balance. You should only spend what you can afford because retirees should earn interest from their asset – not pay it from their liabilities.
- Prioritize Your Health: There’s not a lot of value in working your arse off in building a robust nest egg only to kick the bucket due to a terminal illness before you get to enjoy the fruits of your labor. As we get older, our body becomes less tolerant of poor health habits. It may be a cliché but now is the time to build the habit of exercising and eating right so that you can add more years to your life and more life to your years. Get regular checkups and screenings so that any problems can get detected early enough to do something about them (fingers crossed).
- Encourage Independence For Dependents: You may be at a tough stage in life where aging parents need help and adult children are just getting started in life. When you get squeezed at both ends like this it is hard to take care of your own retirement planning needs at the same time. If your kids are out of college and not disabled, encourage their independence. Empower instead of enable. It is important to respect your financial needs as much as everyone else’s. If you really need to subsidize them financially in the form of car/house down payment or wedding expenses, it is imperative to factor these lump sum figures too into your retirement planning.
- Review Your Life Insurance Coverage: Life insurance that was appropriate when your savings and kids were both small may be a wasteful expense at this stage of life. You’re entering a different phase of life and your insurance needs should change to mirror life’s changes. It is generally a taboo in the industry to ask you to surrender any irrelevant insurance policies – but whatever needs to be done, must be done. Best if get an independent financial adviser to review your needs without pushing you any extra insurance.
- Get new or Supplement existing Health Insurance coverage: It’s time to get an up-to-date quotes on how much post-retirement medical insurance will cost OR get an estimates for self-insuring, depending on your immediate family medical history. It could be a full-fledged medical card or it could be a deductible medical card which auto converts to a full fledged medical card without further underwriting at the point of retirement. If you choose to self-insure, be aware that there is no ceiling on how much it will cost in the future – so you’ll have to bear with the uncertainty here and adjust your post retirement finances accordingly should medical condition hits you or your partner. These numbers are significant and must be built into your budget. Complete and file the applications once you have decided the plan and annual premium that best fits your needs and budget respectively.
- Get A Second And Third Opinion: Get referrals for at least two fee-only independent financial advisers. Have them look over your portfolio, budget, and investment allocations and provide additional opinions. You want to make sure you haven’t overlooked something important or completely misjudged the situation. Fee-only financial planners can help you sort out some of the more technical questions like sorting out which medical insurance in the market best suit your needs, or do reverse simulation on how long your retirement assets can last you given your current lifestyle.
These questions can be simple but the answers can be complex, and they vary with individual circumstances. Do not be stingy on paying for advice – the fee charged for the personal advice is cheap insurance for the value provided by having an educated, second set of eyes look over your retirement plan. Just don’t let them sell you any investments or insurance. You want impartial advice – NOT a sales pitch.
One more thing: As detailed as this can get, don’t be deceived by the mathematical precision of it all. Retirement planning deals with the vagaries of life – not the precision of science.
For these reasons it is wise to use a range of assumptions from pessimistic to optimistic to determine how secure your retirement plan is.
Try inflation at 7% rather than the customary 3% and watch the impact. Throw a bear market, cancer, or a bypass surgery at your plan and see how it holds up.
Ultimately, no retirement plan is ever complete no matter how accurate it appears today. This is just the unfortunate reality of making a long-term bet on an unknowable and unpredictable future. Just do the best you can and build a safety cushion just in case one of your assumptions proves to be too optimistic.
The problem with retirement planning is the necessity of making a bet on an unknowable future. You must make assumptions about the future to build your plan, but the assumptions could be wrong. Inflation might be higher than expected, you might live longer than expected, or your assets might grow slower than expected.
Worst of all, you could experience catastrophic and expensive health problems. Each of these risk factors is potentially large enough to undermine the best planned retirements.
This may not be a pleasant or comforting way to approach retirement planning, but reality is reality whether we like it or not.
Stage 2: Mid Phase: Seeing the light at the end of your retirement tunnel
- Buy off the plan: By now your retirement plan should be very detailed – with your partner’s consensus – whether you construct the plan yourself or via the help of an Independent Financial Adviser. Your budget should be based on your own real numbers rather than generalized assumptions. Your future lifestyle should be estimated, and your expected income from investments and retirement plan benefits should be known.
- Put it into Test: If you are thinking of spending your retirement in Penang then schedule your next few vacations for different times of year there. Similarly, if you plan on retiring at your home in KL with only 50% of your current income try living on that budget now while you still have earned income to bail you out if it proves not viable. Or if you plan on building a second career then begin laying the groundwork. In short, start test driving your dream today so that you can realistically correct and adjust any incomplete plans and move toward your new future with confidence. Getting started now will smooth the transition.
- Financial Planning: Are you going to take a lump sum payout or monthly payments? Are you going to leave your EPF monies untouched or withdraw them into alternate investments generating retirement income? What is your investment strategy? What will be your asset allocation during retirement? Are you going to purchase fixed annuities or accept the risks of fluctuating investments in hope of a higher return? Regardless of your decisions, do not forget these 3 investing tennets I told my clients on investing. The fact is – you are entering the window where these decisions must be made, no matter how hard it can be. A fee-only independent financial adviser can help.
- Consolidate & Organize: If you are like most people you have investment account and savings scattered in various places over the years. You should consolidate your accounts and view them as just one source. Automate as many of your financial transactions as possible including routine bill paying and monthly deposits so that you have the flexibility to run your financial affairs on the road or in a foreign country. You want to “Keep It Simple Stupid” so that you are free during retirement to do as you please without being bogged down by disorganized paperworks.
Stage 3: Late Phase: Your Retirement Imminent, a point of no return
- Execute Your Withdrawal Strategy: When the time comes to replace your active income by withdrawing assets, where will the capital come from? In what sequence you are liquidating your savings to fund current living expenses? You want to have the answers to these questions before your last paycheck.
- Annual Budget, Asset and Cash Flow Review: Just because you put a retirement plan in motion doesn’t mean it necessarily worked according to plan. Scrap that – actually, it won’t. Your finances do better than planned and sometimes they do worse. For that reason, you must review your assets, budget and cash flow each year so that you can correct and adjust. This includes reallocating assets, reviewing investment performance, adjusting withdrawal rates, and anything else necessary to make sure your money lives as long as you do.Like they say – don’t run out of money before running out of life!
- Healthy Habits: Studies show the human body has a remarkable ability to recover from a lifetime of abuse with just a few short years of healthy habits. Now is the time. You may have used the excuse of being too busy working and raising kids to rationalize not preparing healthy food and exercising regularly, but you don’t have that excuse any more. It is hard to imagine a more important and worthwhile way to spend your new-found extra time than taking care of your health. After all, what is the point in spending a lifetime building a secure retirement only to kick the bucket early and never enjoy it all?
- Beware of Fraud: Retirees are unfortunately a favorite target for con-artists because they usually have more assets to be conned out of than the average man on the street. Check Securities Commission’s Investor Alerts list when you do encounter too-good-to-be-true opportunities that got presented to you – this one step alone will prevent you from falling into the many financial frauds out there.
- Keep Your Estate Plan Up to date: Ensure your estate plan includes such items as wills, declaration of trusts (if needed) , powers of attorney, gifting, and all beneficiary designations are accurate and current. Why this is so crucial? Note my previous post here – on the Importance of estate planning.
Finally, go out and cherish every moment of your retirement. You’ve earned it. Financial happiness is much more important at this point of life.
Live all those forgotten dreams that got buried in the busy-ness of your career and have a great time doing it.