Designing a Retirement That Can Absorb Shocks
In my recent blog posts, I've tried to broaden the retirement conversation beyond running the numbers and optimizing projections. I want seniors to keep their lives at the center of their financial planning and let their goals guide more of their decision-making.
But even the most carefully considered decisions, and the best-laid plans, eventually run into real life.
And that's the true test of a financial plan. You don't have to do a lot of math and projecting to figure that you'll be OK in retirement if the markets are roaring, your health is good, and your house is sturdy.
But are you prepared for market volatility? An unexpected diagnosis? A major home repair?
Will you be able to handle disruptions without being forced into bad decisions?
To answer "Yes" at these critical moments, your financial plan doesn't need to be "perfect." It needs to be resilient.
Plans Break Under Pressure, Not on Paper
On paper, most financial plans look workable.
That's because whether you're using standard money management apps or a back-of-the-napkin financial planning "rule," the equations usually take some variables for granted: steady inflation rates, positive average market returns, predictable withdrawal rates, etc.
The built-in bias to these simplified projections is the assumption that life will unfold in a straight line. And if, at the end of the calculation, you come up with a flashing red number, you can always go back and tweak something else until you get a better result.
But in my experience, retirement plans rarely falter because a single variable was off by a point or two.
In the real world, problems don’t arrive neatly, one at a time. A severe market downturn might trigger a spike in inflation. You might have to repair hail damage to your roof the same week that you get hit with an out-of-pocket medical bill.
It's when these multiple stressors hit a financial plan simultaneously that the cracks begin to show. And if you don't have the ability to make adjustments, you might find yourself scrambling to fill in those cracks any way you can, without considering the long-term consequences.
Build Flexibility Into Income
When you were working, the foundation of your financial plan was a single predictable income stream: your paycheck.
The foundation of a resilient retirement is income flexibility. No matter how much you scale back on certain expenses, your nest egg still needs to replace enough of your pre-retirement income to sustain your lifestyle and meet key goals, like bucket-list travel and legacy planning. At the same time, your withdrawal and spending plan also needs to be able to absorb shocks, in both the larger economy and your life.
Your retirement blueprint might start with a stable "floor" of guaranteed income sources, like Social Security and a pension. This is the money you can rely on to cover your basic needs.
With that secure foundation in place, you might use withdrawals from your retirement accounts to cover discretionary spending, like travel and hobbies. If the markets dip, you might naturally scale back on some of these non-essentials. But with that floor of guaranteed income, your day-to-day lifestyle probably won't change much.
Because you and your financial advisor planned ahead, you'll stay in control of your money and how you spend it. And you'll avoid getting backed into worst-case scenarios, like panic selling investments or depleting cash reserves ahead of schedule.
Liquidity Buys You Time
Folks who "optimize" their financial plans above all else often view cash savings and short-term fixed-income investments as a drag on growth. And yes, even the most generous interest rates on savings accounts probably won't outpace normal inflation over the course of decades.
But the less cash and fixed investments you hold heading into retirement, the less flexible your spending plan is. What saved cash is lacking in return on investment, it makes up for with the options it can open up when sudden needs arise.
Generally, we advise seniors to maintain a cash savings bucket that will cover six months to a year of their monthly expenses as well as fixed income investments in their broader portfolio to cover 3-5 years of income needs. In the event of a major downturn that disrupts your withdrawal rate, you can use this liquidity buffer to buy some time until the markets do what they typically do: rebound and continue to grow wealth. Dipping into cash reserves can also prevent secondary problems, like making an unplanned withdrawal from a retirement account that bumps you into a higher tax bracket for the year.
Some folks might create savings buckets for more specialized needs as well. An emergency health care bucket could help insulate your plan against costs that Medicare doesn't cover. A travel bucket could help you save a little extra for a long-planned trip in case some costs suddenly shoot up.
Simplicity Improves Durability
During your working years, your financial life might become increasingly complicated. If you change jobs, you could have multiple 401(k)s from different employers. You might have brokerage and savings accounts spread out across a couple of different financial institutions. Your monthly budget might expand to include multiple mortgages, vehicle payments, credit cards, and student loan payments for your kids.
Some folks might even see this complexity as a measure of success – and with good reason. It’s fulfilling to watch your money working as hard as you have to make life better for you and your family.
But financial complexity can also introduce unnecessary risks over time. The more accounts you have at multiple institutions, the more difficult they can be to monitor and manage efficiently. Married couples have to be extra diligent about assigning survivor benefits and granting account access. Credit accounts and subscriptions might keep racking up charges and fees even if they’re not used regularly. And some seniors might struggle to keep all their info straight as they age.
Paying down debt, eliminating unnecessary spending, and consolidating financial accounts can add extra durability to your retirement plan. When you and your financial advisor can easily assess the big picture, it’s easier to make clear, confident decisions, especially in high-pressure moments.
Design for Change
Even if you head into retirement with a detailed plan for how you're going to spend every day of the week, it's inevitable that your plans, your priorities, and your life are going to change.
Your financial plan needs to be able to change, too. You don’t want to feel locked in by choices you made years ago – before you became passionate about golf, before you decided you wanted to start your own business, before you had grandbabies to think about.
At Keen Wealth, our comprehensive planning process can give you the tools to make adjustments and the confidence to choose, to explore, to help, to connect, to learn, and to grow throughout retirement.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on 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 Forbes, 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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