Recalibrating Retirement Readiness

A recent article in Financial Planning magazine reported that Americans are falling behind in saving for retirement readiness [“Four Reasons Retirement Readiness is Declining,” May 2023]. Some 55% of Americans are behind, and 35% are “significantly behind” where they need to be able to retire in comfort.

Worse, the Federal Reserve has reported that 26% of U.S. workers have no retirement savings at all. Four key impediments were identified: 

  • Inflation. Prices have been rising at rates not seen in a generation or more. Although the rate of price increases has slowed enough that the Federal Reserve held interest rates steady last month, additional interest rate increases are expected later this year, according to many observers. As higher prices put the squeeze on the family budget, suspending retirement savings is a tempting way to economize.
  • Stock market volatility. Rising interest rates have affected the economy in a variety of ways, with some sectors suffering more than others. Stocks were down in 2022, which may have undermined investment confidence for some savers. Finding the time for navigating these choppy markets can be a daunting task for someone with other responsibilities. 
  • Health care costs. Rising medical expenses are another factor that may impinge upon keeping up with a plan for saving for retirement. Some 55% of those who return to work after retiring identified health care needs as a key factor in “unretirement,” according to the article. 
  • Unrealistic expectations. Some people underestimate how much savings will be required for a comfortable retirement, or they may overestimate the investment returns their portfolios will yield. For those who have successfully accumulated sufficient financial resources to take the big step of declaring the end of the working years, there are still other important questions to consider.

The emotional side

Retirement is an emotional transition as well as a financial transformation, a declaration of financial independence. Here are some questions that one must face, and issues to sort through.

Is the time right? After a long career, it may be time for a change, time for a rest. Even if that is the case, it’s important to enter retirement with a plan for staying mentally and physically active, and in contact with other people.

Are there are more compelling things to do? Career demands may have caused the deferral of some activities or pursuits, and retirement provides the time needed for exploration and enjoyment.

Is your job changing? Especially

during periods of economic transition, the needs of an employer may be evolving in ways that demand too great an adjustment by older employees. That’s why many will accept an offer of early retirement during a reorganization or downsizing. But one also should check for reasons not to retire, because they may indicate that more emotional preparation is needed before taking the retirement plunge.

Is work enjoyable? The daily routine can be full of habits that are hard to break. For jobs that are not physically taxing, one can continue to be productive until age 70 and beyond.

What about the pleasures of camaraderie? Some people feel a sharp sense of loss after retiring. They may miss the workplace and colleagues.

 Are there better options? Without a good plan for retirement, one runs the risk of loneliness and depression. Being a couch potato may be temporarily relaxing, but it isn’t very satisfying.

Retirement budgeting

Developing a realistic retirement budget is an important exercise, one that requires an examination of values as much as resources. Some people enjoy living rather modestly during retirement. But one retiree we know says, “Life is too short to drink cheap wine.” The retirement budget needs to be understood from three perspectives.

 Essential versus discretionary spending. Which expenditures could be curtailed, even eliminated, in the event of financial reversals? Food is essential; restaurant dining is not. Is there room in the budget for savings?

 Structural versus peripheral expenses. Some costs are binding, not subject to modification, and failure to meet them means a structural change in retirement. If you own real property, you must pay the taxes. If you have a mortgage, you must make the payments. If you own a car, you have to pay for routine maintenance.

Trips, vacations and gifts, in contrast, are peripheral expenses.

 Fixed versus inflation-prone costs. Most retirement expenses are vulnerable to inflation, while retirement income generally is fixed. The response to rising prices may include cutting back on optional purchases or substituting less expensive items for those that become unaffordable.

 Understand also that long, modern retirements typically include three phases:

  • active retirement, filled with travel and pursuit of deferred dreams;
  • passive retirement, typically beginning in the late-70s, when activities are gradually reduced; and
  • final retirement, a period often marked by failing health and a need for long-term care.

A different retirement budget applies to each of these three periods.

Put us on your team

We specialize in two areas of personal financial management:

  • Helping clients achieve financial independence, using tax-sensitive techniques as appropriate.
  • Helping clients maintain financial independence by providing unbiased investment advice and trusteeship.

For specifics on how we might help you, schedule a meeting with one of our wealth consultants.

© 2023 M.A. Co.