By Chris Carosa
Can you predict the future?
Don’t worry. That’s a trick question. No one can.
And yet, if you’re like most people, you do worry about it.
That’s normal. And it’s not really the future you’re worrying about. It’s the uncertainty.
Think about it. Are you more concerned about what will happen in the next minute or the next day? The next day or the next week? The next week or the next month? The next month or the next year?
As you move further distant in time from the present, you naturally become more uncertain. And with that progression, you have an inherent tendency to increase your anxiety.
Why do you think so many people fret about their own retirement? It’s not about the money. It’s about how so many far away uncertainties ravage their thinking.
“I would say the most critical factor in a successful retirement is not financial at all. As a financial advisor, sometimes you have to read between the lines. What most people really want to know about their portfolio is: Do I have enough for my future? I would say the most important part of retirement is peace of mind,” says Dan Trumbower, Senior Wealth Advisor at Halpern Financial in Rockville, Maryland.
While it remains impossible to see into the future, it is possible for you to reduce your stress as it relates to uncertainty. Just treat your own retirement the same way you approach project management at work.
You don’t have to be an engineer or a management consultant to understand project management. It’s just another name for a recipe. It’s simply a series of steps you take to, say, make a delicious cake.
Sure, the first time you make a cake you may be worried whether it will turn out right. But that worry is alleviated once you find the perfect recipe from that cover-worn old cookbook that’s been handed down to you from the generations.
With the confidence provided by this tried-and-tested numbered set of instructions, you can greatly reduce, if not fully eliminate, your culinary concerns. You’ve identified and acquired the necessary ingredients, collected the necessary cooking utensils and placed the oven at the proper preheat level.
You now stand athwart the winds of the future, ready to face uncertainty with the poise of a master chef.
While making a comfortable retirement isn’t as easy as making a cake, it does have a fairly reliable sequence of steps you can implement without too much effort. Undertaking these four steps, no matter where you are on the road to retirement, will help alleviate any retirement-related stress you might be experiencing as a result of today’s headlines.
Step 1: Start at the End: Picture the Perfect Retirment
Before you decide what cake to make, you must first envision it. That’s your starting point. You work backwards from that end image. Retirement is no different.
“It might sound simple although often overlooked, but the most critical factors that can make retirement comfortable is spending time thinking about what is most important to you, how you view a comfortable retirement, and what resources you will have to allocate for yourself now and in the future,” says Kayse Kress, Director of Financial Planning at Physician Wealth Services in West Hartford, Connecticut. “If you are not sure what the end goal looks like it is hard to create a long-term savings plan to account for your current needs and expenses while also planning for a comfortable future.”
Once you have the image of your retirement in your mind you can move on to the next steps. But be careful here. That image must have a firm foundation in fact. It cannot be mired in unrealistic fiction.
“Be honest with yourself in terms of goals and lifestyle in retirement,” says Patrick Healey, Founder and President of Caliber Financial Partners located in Jersey City, New Jersey.
Step 2: Define the Critical Path to Pave the Road Ahead
This step is often the most difficult to accomplish without help. It’s possible, but only if you’re very disciplined. That being said, it’s better to humble yourself and seek advice from those who have done this before than risk missing a link in the chain that results from this step.
That’s right, this step produces a series of instructions you must follow to attain the comfortable retirement you first pictured in Step #1. You may call this your “Financial Plan.”
“Having a Financial Plan is the most critical factor for a comfortable retirement,” says Amin Dabit, VP of Advisory Service at Personal Capital in Denver. “It’s the best way to make sure you are making good decisions and staying on track for a comfortable retirement. Having a plan will help you pinpoint the most important goals and the biggest concerns you have so you don’t get distracted by all the noise that is out there.”
This plan will offer tactical guidelines regarding your current budget in light of your future goals.
“Your savings rate and the amount you spend in relation to that savings is the most important factor to consider,” says Kress. “The closer you can align your current and long-term goals to the resources and savings that you have, the more comfortable you will feel with your finances overall not just in retirement.”
Ultimately, the portrait of your comfortable retirement should anticipate your post-retirement budget, too. This helps you better cook up the future of your dreams.
“For those preparing for retirement, it’s critical that they know the timing and sources of income they expect to receive,” says Ahmad Soleiman-Panah, a financial advisor at Nicola Wealth in Vancouver, British Columbia. “For business owners and incorporated professionals, most of their saving and investing is done in their corporations. How they draw that income out in retirement is a key decision, particularly as it relates to taxation.”
Step 3: Embody the Virtue of the Tao of Cash Flow
“Cash flow is the most critical factor of a comfortable retirement,” says Robb Hill, President of R Hill Enterprises, Inc. in Aurora, Illinois.
That adage cannot be understated. To the extent you can more accurately predict your retirement revenues and expenses, you’ll move that much closer to predicting the future. “It’s important that clients and their advisors meet before retirement and map out a strategy for how their income needs will be funded throughout retirement,” says Soleiman-Panah.
Indeed, cash flow represents the oil that keeps your retirement engine humming comfortably. “How much is enough?” says Michael Farrell, Managing Director at SEI Private Wealth Management in Oaks, Pennsylvania. “You need to know your cash flow number. It is the lifeblood of planning and can overwhelm any other assumptions. Keep on track and revisit allocation and capital market assumptions to be sure you are optimally allocated to meet your cash flow needs.”
Alas, here’s where you can err if you count your revenue chickens before they hatch. “Government-sponsored pension plans, such as Social Security in the United States or Old Age Security in Canada, will reduce your entitlements if your income from other sources exceeds certain thresholds,” says Soleiman-Panah. “If you plan to retire early or begin taking pension income before set retirement age, also expect to receive a reduced pension amount.”
Ironically, it’s precisely when bad news headlines dominate the media that the greatest opportunity to extend future cash flow potential presents itself. “With low interest rates and the need to have stocks in your portfolio to keep up with inflation, retirees often cannot depend solely on interest and dividends,” says Abbey L. Henderson, CEO, wealth advisor, and coach at Abaris Financial Group in Concord, Massachusetts. “Cash flow needs to be planned for and created.”
Step 4: Relieve Stress by Conducting a Stress Test
Are you more afraid of the future you don’t know or the future you don’t know you don’t know? In the past, retirement, while anticipated by the hands of an omnipresent countdown clock, came with blunt suddenness. This means you need to go beyond your grandfather’s financial plan when it comes to readying yourself for a comfortable retirement.
“The obvious answer from financial professionals would be ‘to have a plan,’ and that’s a great answer and a must-do,” says Marcia Mantell of Mantell Retirement Consulting in Needham, Massachusetts. “But what I find from talking to many retirees is that they need a structure to their days. If they retired all at once after working 40, 45 years, it’s like jumping off a cliff into a great unknown. It’s too abrupt. They are used to a schedule, chock-full of important things to do. They are accountable to others. Their opinions matter. Then, there’s nothing. So, setting up their days with some semblance of time management helps ease the transition. Otherwise, they end up sitting on the couch all day and with no accomplishments.”
Today, a phased retirement strategy is recommended. This allows you to kick the tires and take retirement for a test drive before committing to the long journey.
“Your financial strategy can of course contribute to your peace of mind in retirement,” says Trumbower. “A few years before retirement, it is a great idea to ‘strength test’ your portfolio. Create projections of many possible market scenarios to see how your portfolio would respond. This gives you really valuable information before it’s too late to make a change. Perhaps a different portfolio allocation is needed in retirement, or maybe working one or two additional years and contributing to your accounts during that time would make the portfolio much more resilient to shocks.”
Remember, these steps have a purpose. They’re designed to reduce your current retirement worry. They focus you on the here and now, the immediate tasks you can anticipate, control and complete.
Each tomorrow that you feel comfortable predicting sets your mind at ease when it comes to the tomorrow after that.