“Every traveler has a home of his own, and he learns to appreciate it the more from his wandering.”
-Charles Dickens, A Christmas Carol
Your retirement is a lot like your house: It belongs to you, but you can’t help comparing it to your next-door neighbors’. Perhaps you make changes to your home or property based on what your neighbors do. Maybe they even take the lead from you.
At the end of the day, however, your home is where you spend time with your family, where you begin all your other adventures, and where you rest your head at night. It’s a place of general security. And yet, if you’re honest, you sometimes wonder if it’s as secure as it could be. Or, at the very least, you may wonder if it’s as safe as the neighbors’.
With the backdrop of A Christmas Carol and the three Spirits that visited Scrooge, this article seeks to uncover some of the Spirits that retirees often worry about during retirement, and how your financial adviser plays a role in driving away those fears.
The Ghost of Retirement Past: Taxes
The first Spirit that dwells within the hidden recesses of retirement is Taxes.
The modern income tax in America originated in 1862, during the Civil War. It was originally supposed to be temporary and therefore ended in 1872.1 It made its reappearance in 1913 with the 16th Amendment to the U.S. Constitution, and Uncle Sam never second-guessed himself again.
Since taxes can’t be avoided, the American retiree must utilize all the tools at their disposal to ensure that the impact on retirement income is minimal. We sympathize with Snoopy when he petitions the IRS to “cancel my subscription and remove my name from your mailing list.” If only.
Without proper planning and foresight, you not only deprive yourself of using your resources to their maximum potential during your lifetime, but you also risk passing on a ticking tax time bomb to your loved ones in the future.
Understanding the ever-changing tax laws and putting a plan in place to mitigate their effects is the way forward. Investment returns are great, but receiving a retirement distribution in the most tax-efficient manner is what really matters.
The Ghost of Retirement Present: Inflation
The second Spirit also has a reputation that precedes itself: Inflation.
“Inflation is the crabgrass in your savings,” according to comedian Robert Orben. If taxes take your money after you earn it, inflation takes the fun out of your money before you can even spend it, since it lowers your purchasing power.
Instead of hiding from inflation, you must be proactive about it. This is the primary rationale for allocating a portion of your investment portfolio to stocks.
Over the last 100 years, inflation in the U.S. has averaged about 3%. The S&P 500 has averaged about 10%. Bonds have averaged about 6%.
Net of inflation, it’s easy to see why retirees shouldn’t be too quick to move to an overly conservative investment portfolio, debunking one of the biggest retirement myths, which says you should have more bonds than stocks as you enter retirement. This is true if you just “moved in” to retirement, or if you’ve been retired for longer than you worked.
To put it another way, your financial plan should include exposure to great, innovative, and profitable companies whose CEOs and leadership teams are responsible for driving growth and earnings. If not, inflation will take away much of your fun during your retirement.
The Ghost of Retirement Future: Sequence of Returns
Our third Spirit is perhaps the most shrouded in mystery: Sequence of Returns.
Imagine two clients beginning retirement with a $1,000,000 portfolio, and both take $50,000 distributions annually with a 2% inflation increase.
- Investor 1 experiences 15% declines in portfolio value in years 1 and 2 of retirement.
- Investor 2 experiences the same 15% decline, but it doesn’t occur until years 10 and 11 of retirement.
The result: Investor 1 is on track to run out of money in the 18th year of retirement, while Investor 2 has preserved $400,000 of their retirement portfolio, even though they experienced the same returns and declines over the same timeframe. In other words: The timing of these returns matters.2
The solution here lies in accessing liquidity that’s not currently tied to the stock market. This provides the money needed to avoid selling stocks at a loss. This can be cash savings, interest and dividends from investments, bonds, or CDs that are maturing, or the cash value in a whole life insurance policy.
Your Eventual Jacob Marley: Long-Term Care event
A fourth bonus Spirit that will visit you during retirement is a Long-Term Care event. It’s important to begin by considering where you’d prefer to receive care and how you plan to pay for it, whether through personal savings, family support, Medicaid planning, or long-term care insurance. November is Long-Term Care Awareness Month, so be sure to check out this article for more details.
Face the Future with a Plan
At the end of A Christmas Carol by Charles Dickens, we find our Scrooge a changed man: “I will honour Christmas in my heart, and try to keep it all the year. I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach.” In a similar way, may you ever take the lessons from the Three Ghosts of Retirement (Past, Present, and Future) with you on your journey, and work with your adviser to develop a successful and exciting retirement plan.
Happy Holidays.
