OUR MONTHLY GUIDE TO EVERY MILEPOST, JUNCTION, AND LANDMARK ON YOUR ROAD TO RETIREMENT
Have you ever gone on a trip where it took you a lot of effort – and a lot of miles – to get to your destination? Maybe you were trying to make the finals of a sporting event. Maybe you were flying halfway across the world via multiple layovers and connecting flights. Maybe you were driving for hours and hours to get to that national park you always wanted to see.
But when you finally reached your journey’s end, you realized you spent so much time thinking about how to get there, you didn’t plan what to do when you arrived. You thought: What do you mean I still need tickets to get in? Or: Nobody told me it would be this rainy, and I didn’t pack a poncho. Or maybe, so what is there to eat around here anyway?
In other words, you got there, looked around, and asked yourself: Now what?
As a financial advisor, I’ve seen many investors ask this question after reaching the destination they’ve planned for more than any other: Retirement. So, over the next few issues of The Retirement Road, we’re exploring the question of “Now what?” We’re looking at the decisions and opportunities that ensure a smooth transition and a high quality of life in the immediate aftermath of retirement. Let’s dive in!
Let's start this issue by continuing with the idea of destinations. Because one of the most common goals that almost every retiree has is to travel more.
Retirement will certainly bring you more time to travel, while a good retirement plan can help you secure the means. One thing it will not necessarily do, however, is make travel easier.
Let’s face it: As fun as travel can be, it can be taxing on the body, stressful on the mind, and hard on even the fattest of wallets. Most retirees dream of jetting off to the four corners of the world or taking endless road trips in an RV…only to find that such a lifestyle can be more exhausting and expensive than they expected. As a result, many retirees end up traveling much less than they expected. Others begin retirement with the intention to travel, but no clear idea of where to go first. Some retirees realize they no longer have the health to do much at their dream destination. And some use so much energy and savings on their first trip that they find they have nothing left after that.
For these reasons, it’s important that you begin deciding now which places you most want to see in retirement. We recommend going about it like this:
The point of all this is to make your goal of travel in retirement a reality by being as specific as possible rather than vague and nebulous. You may actually get to see all of the world you most want to see without causing undue wear and tear on your body or your bottom line.
And, best of all, it’s the most enjoyable part of planning for retirement!
“Wealth consists not in having great possessions, but in having few wants.”
— Epictetus
Travel is expensive – and nobody wants to dip into their savings to do it more than they absolutely have to.
That’s why every retiree should have a strategy for when they will withdraw money from their accounts, which accounts they will draw from first, and how much they should withdraw every month, quarter, and year. There are many potential strategies to choose from, and a near-infinite number of ways to customize each strategy for you. Over the next few editions of this newsletter, we’ll break down a few of the more common. This month, let’s look at:
4% Strategy. With this, “back-of-the-napkin” approach, you take out 4% of your portfolio in your first year of retirement. Then, every year afterward, you increase the amount you withdraw to be consistent with inflation. This helps ensure you continue drawing enough to maintain your lifestyle as prices go up. (Except in very rare circumstances, prices will always go up over time, even if the inflation rate isn’t particularly high.)
Now, your needed withdrawal rate may not be 4% in that first year. It could be 3%, or 5%, or whatever. The point is that you establish a “just enough” baseline early on that you gradually add to year over year to keep up with inflation.
Every strategy comes with both benefits and downsides, and this one is no exception. The downside is that the 4%-plus-inflation strategy can sometimes be a little too rigid depending on what’s going on in the markets. For example, in a bear market, you may want to dial back on your spending so you don’t drain your investments too quickly. In a long-term bull market, on the other hand, you may find yourself underspending. That means leaving goals and dreams on the shelf that you should be enjoying.
However, if you expect both your spending and your expenses to remain fairly consistent year to year, then some variation on the 4% strategy may work well for you. As always, it’s important that whatever strategy you choose be consistent with your overall financial plan. There is no such thing as a strategy that suits everyone. It will always require at least some customization!
Sometimes, money can be music to your ears — literally! Did you know that an English £5 note can be used to play vinyl records? It’s true! All you need is a contact microphone and a small amplifier. Because the corner of these five pound notes are particularly durable and sharp, it can function like a needle on a record player. (This unique capability is due to the banknote being printed on polymer.) Although the sound isn’t of the highest quality, it’s still an impressive attribute!
SOURCE:
Britain’s new five-pound note can play vinyl records
For adults like us, “toys” don’t mean dolls, action figures, or miniature race cars. Typically, they mean the latest electronic gadgets, a new sound system, a boat…even a real race car.
Many people treat the early days of retirement as a shopping spree. All those toys they felt they couldn’t afford or couldn’t justify are now theirs for the taking. As a result, one of the first things many new retirees do is buy that antique hot rod, vintage Gibson guitar, vacation home in Key West, or even a shiny new boat.
On the surface, there’s nothing wrong with this! Retirement should be spent doing the things you enjoy with the things you enjoy.
But buyer’s remorse doesn’t end when work does.
Sometimes, these mammoth purchases can come with a lot of unintended headaches. It’s one thing to take a boat out onto the water…but what if you only have a chance to do so two times a year? How will you store it those other 363 days? What if you find you don’t actually like all the hassle of maintaining your new RV, or feel particularly comfortable driving it on narrow mountain roads? What if that Gibson guitar is actually painful, because arthritis is setting in? What if Key West turns out to be a lot more expensive than you thought?
The point of saying this isn’t to discourage you from buying any of these toys. The point is that you should start determining now what toys you truly want…because you know they’ll get used.
Which means we have a little more homework for you. But guess what? This homework is fun!
Rather than waiting for retirement to buy these new toys, take time over the next few months or years to rent them instead. Go rent an RV for your next trip. Take it out for a week to see if you truly enjoy driving them. Go rent that Gibson guitar. Do you find yourself dying to play it every evening…or does it really just sit in the closet? Go rent a vacation property for a few days in Key West. Can you see yourself living there most of the year, or does the humidity quickly get old? You get the idea.
Think of the toys that sound most appealing in retirement. Give them a go now. By doing so, you’ll cut down on impulse buys and buyer’s remorse in retirement…saving your hard-earned money for the things you really want most.
You’ve heard the saying that the markets can be a rollercoaster ride? That old axiom was certainly proven in July. The month began with a long, fairly sustained climb, thanks to enthusiasm about declining inflation. The Consumer Price Index fell to 3% in June, meaning prices were up only 3% compared to the same period last year. And the Personal Consumption Expenditures index — which also measures consumer prices, but in a broader way — fell to 2.5% in June compared to a year earlier. Seeing this data prompted renewed speculation that the Federal Reserve would cut interest rates sometime in the summer…and the markets rose accordingly.
About halfway through the month, though, something unexpected happened: A worldwide IT outage. Financial services got interrupted, broadcast stations went offline, and planes were grounded as computer experts struggled to figure out what was going on.
The reason ended up being fairly mundane: A single faulty update from a single cybersecurity company caused havoc for computers running Microsoft Windows. Still, the IT crash was enough to inject volatility into the markets. That volatility continued throughout the rest of the month, before the markets recovered somewhat at the very end, thanks to hints from the Fed that a rate cut really may be on the cards in the near future.
What We’re Keeping an Eye On In August and Beyond
July’s rollercoaster – up, then down, then up – shows why investors should not overreact to the weekly gyrations of the markets. Those gyrations may continue in the short term, though, as investors continue to wait with bated breath for a drop in interest rates. Another month of good inflation data – or signs of a continued slowdown in the labor market – may make such a market drop more likely.