According to a recent study by the Employee Benefit Research Institute’s Retirement Security Research Center, affluent retirees are, on average, more satisfied than retirees with modest assets and folks who are just managing to get by.
Now that probably doesn't sound like a very eye-opening conclusion. But what the EBRI found was that it wasn't really money that made affluent retirees feel better about retirement. It was three factors that I believe should be a cornerstone of any retirement plan, no matter how big your nest egg is.
1. Diverse, guaranteed income streams
In financial planning, we often talk about the importance of diversifying your portfolio so that you're not too dependent on one or two securities or other investment vehicles. But respondents who fell into the affluent group (which the EBRI defined as having at least $320,000 in assets and at least $100,000 in annual income) were more likely than folks in other groups to have diversified income streams as well. Having multiple sources of income gives retirees financial flexibility. For example, if you're not relying on Social Security alone to pay your monthly bills, you can put that money into an emergency savings account, invest it, or have a little fun. If the market is down, you might use money you'd usually withdraw for expenses to "buy low" and spend from your savings account for a quarter or two.
The study specifically mentions pensions, which is an advantage that many current seniors have over the next generation of retirees. Folks who don't have generous corporate benefits to rely on have to be particularly thoughtful about their saving and investment strategy if they want to achieve similar diversification when they do retire.
2. Low debt
For the most part, the EBRI study's affluent retirees were homeowners who weren't paying mortgages. Most of them also had no credit card or auto loan debt.
Of course, carrying debt is not necessarily a bad thing. If used responsibly and paid off at the end of every month, credit cards are convenient and can allow you to build up some perks like frequent flier miles. Responsible use of credit also improves your credit rating, which can come in handy if you're thinking about buying a new home in retirement or making any other big-ticket purchases.
As for larger debts, yes, it can feel good to go into retirement without any mortgage or vehicle payments. But if your interest rates are fixed and payments fit your budget, there are scenarios where it makes more sense to keep making monthly payments rather than paying off big balances before you retire.
One phrase I didn't see in the EBRI study was "student loan debt." No surprise that affluent retirees aren't still helping adult children settle their college bills. There's nothing wrong with helping grown kids get a leg up in the world. But retirees who aren't giving their adult children a firm but gentle nudge towards financial responsibility could be putting their own retirement plans at risk.
3. A defined spending strategy
Combining a diversified income stream with a low-debt monthly budget is a great starting point for a retirement spending strategy. In fact, many of the EBRI's affluent retirees said that their standard of living had either stayed the same or improved in retirement.
That sounds like a great retirement outcome. But there are a couple common, worrying trends worth mentioning here as well.
For one, the "spending strategy" that many of these affluent retirees had was to "maintain" their nest egg rather than spend it down. Participants cited concern for medical costs later in retirement as one reason they were keeping their spending low.
I'm glad that seniors are thinking about their long-term safety and security in retirement. And I've seen far too many new retirees treat their nest eggs like a jackpot. But living too conservatively can have high physical and emotional costs as well. Retirees who live off cheap canned goods and fast food when they can afford a weekly trip to the farmer's market are setting themselves up for health problems as they age. Couples who putter around the house driving each other crazy instead of travelling or pursuing hobbies could go from depressed to divorced in a matter of years.
Tied to this maintain strategy, many affluent retirees also said that they were experiencing some "sticker shock" as they adjusted to life without a paycheck. I've certainly worked with folks who expected "free" Medicare to cover more services than it actually does and Social Security to provide larger benefits than they'd actually earned. Some nose-to-the-grindstone types aren't prepared to see so much money flowing out every month once they stop working and start filling their time with leisure activities. And many retirees who plan to save money by downsizing discover that selling their house and moving is more expensive than staying in their current home.
When you work with a fiduciary advisor, you’re less likely to feel like you have to choose between securing retirement and enjoying retirement. Call up my team at Keen Wealth and let’s create a plan that coordinates all your assets in a way that will make your golden years truly satisfying.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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