Every major life event comes with a transition period. It happens with children starting school, people getting hired for a new job, and couples getting married. In each of these cases, there’s the initial excitement over a new chapter in your life, the nervousness about what lies ahead, and eventually a comfortable routine.
Retirement is no different. Once you’ve reached that point in your life where you can comfortably leave the workforce and enjoy your newfound freedom, you’re likely to be excited early on, then grow more restless before becoming accustomed to your new situation.
All retirees typically go through a few stages of retirement, whether it’s over a period of a decade or just a few years. Here’s a look at what you’re likely to experience in each stage, and how you might adjust your investment decisions along the way.
The pre-retirement stage occurs when you become more concerned about your post-career life than any advancement or change to the career itself. At this point, you’ll likely be satisfied to continue in your current role until it’s time to retire.
Retirement planning is essential during the pre-retirement stage, which typically extends about five to 10 years before your actual retirement. This is the time to see how your retirement portfolio is performing against your expected retirement needs; if you’re running a little short, you may need to use this time to catch up with additional contributions or possibly pursue a more aggressive growth strategy. If your savings are on track, you may want to shift to a more conservative strategy aimed at preserving the assets you’ve built up.
Assess your current debts and expenses as well as the income sources you’ll have in retirement, such as savings, pensions, retirement funds, investments, and home equity. You’ll also need to consider some major changes that come with retirement, such as changes to your health insurance that come when you move off an employer’s plan and the possibility of downsizing to a smaller home.
By meeting with a financial advisor, you can use this information to set your retirement goals and realistically plan for a lifestyle you’ll be able to afford. This planning should be an ongoing, flexible process that extends into your retirement, helping to ensure that you don’t outlive your assets and that you have enough to leave something behind for your loved ones or a meaningful charitable cause.
As the name suggests, the honeymoon stage is marked by excitement and optimism over your long-awaited retirement. You’re now free to spend your time however you’d like!
This is also a time when retirees tend to splurge a bit, dipping into their savings to take a long-awaited dream vacation. Although it’s a major expenditure, it will also take up a smaller share of your overall savings and won’t have as substantial an impact on its growth potential as it would if you tapped into it later in life.
This stage is a good time to track your income and expenses, monitor your investments, and see how well your assets are supporting you. Your financial advisor can discuss any concerns you may have, and recommend strategies to meet upcoming expenses such as the potential for higher health care costs.
The honeymoon period is usually rather brief. After awhile, retirees start to feel bored or frustrated with the succession of wide open days, and may feel like they’ve lost their sense of purpose.
This stage may also be accompanied by growing concerns about your finances and whether you’ll be able to meet your needs as your retirement extends for several more years. This can also be a confusing time to set a budget due to factors such as required minimum distributions from retirement accounts, Social Security eligibility, and unpredictable health care costs.
This is an especially important time to take long-term care expenses into account and meet with your financial advisor on how you can continue to prepare for them. You should also review and update any documents related to the transfer of your assets in the event of your death or incapacitation, including your power of attorney, will, and estate plan.
During the reorientation stage, you’ve had time to experience retirement and can now consider what adjustments you’d like to make. Reorientation is all about finding a new purpose and pursuing new passions now that you’ve decoupled from work. You may find yourself volunteering more, taking on new hobbies, or creating a bucket list of travel destinations.
Some retirees decide during this phase that they’d like to return to the workforce, although this is usually in a seasonal or part-time capacity. Doing so can help give more structure to your days while also bringing in some extra income.
If you’re earning extra money through a job, your financial advisor can discuss options for investing this money. They can also update your retirement plan to adjust for any financial changes that your reorientation may create.
In this final stage, you’ve established an identity and daily routine you’re satisfied with. This is similar to the routines that come with earlier adjustments in life, but you’ll have more self-direction in your decisions.
Your finances should also be routine, in that your income should be enough to meet your expenses. Your financial advisor can help you monitor your assets to make sure this is the case, and can also help you make any adjustments necessary.
By Ted Reagle
With the Federal Reserve recently raising the target Fed Funds rate to the 5.25% to 5.5% range, now remains a great opportunity—the best in a long time—for retirees to lock in attractive low-risk returns for the portion of their retirement portfolio that they do not want exposed to stock market volatility.
As we saw last year, even short- and medium-term bond funds were quite volatile and did not provide the countermeasure to stock market declines that investors anticipated. So, locking in guaranteed returns at attractive rates in the fixed income allocation of an IRA or other investment account can be very reassuring for investors, especially after enduring nearly a decade in which returns on CDs and U.S. Treasuries were anemic.
Today, interest rates on CDs, U.S. Treasuries, and money market funds are at their highest level in 22 years. Investors can currently earn in the 5% range on any of these low-risk investments.
Interestingly, many retirees may not be aware that these rates are available to them because the bank or institution where their IRA accounts are held may not be publicizing or offering competitive rates. These low-risk investment choices can be readily bought in an IRA or taxable brokerage account at firms like Fidelity, Schwab, Vanguard, and many others.
The window to take advantage of these attractive interest rates could likely last for several more months before interest rates start to decline. Investment pundits anticipate that the Fed could increase rates by a quarter percentage point once more before the end of 2023, and that the Fed will begin to reduce rates either by the end of the year or in 2024 as inflation is brought down to the desired 2% range.
The Fed has raised interest rates for the past 16 months to combat inflation. Higher interest rates tend to reduce demand for goods and services because borrowing costs are higher, which in turn cools inflation. Inflation peaked at 9% in 2022, but fell to 3% in August 2023.
With the availability of 5% returns on low-risk investments, some retirees may be inclined to significantly reduce—if not completely eliminate—their allocation or exposure to the stock market. This could prove to be sub-optimal, however. Most retirement account investors will want to continue to invest a portion of their portfolio in the stock market to enable their accounts to continue to grow sufficiently and keep pace with inflation during their retirement years.
Historically, fixed income investments such as the ones we’ve been discussing and longer term bonds have earned in the 5% range. By contrast, the US stock market has earned in the 10% range, though stocks experience greater market volatility.
A portfolio comprised of 60% stock and 40% fixed income investments has evolved into a “typically appropriate” allocation for retirement accounts that strike a good balance between the desire to minimize risk with the need for the portfolio to continue growing to sustain income throughout one’s retirement years. For many retirees, investing 100% in fixed income will not provide sufficient long-term returns to support a lengthy life expectancy.
I also wanted to touch on the recent news that Fitch Ratings, one of the major bond rating services, has downgraded U.S. government debt, generally perceived to be the safest and most risk-free investment available, from their highest rating of AAA to AA+. This is the second time in history that U.S. debt investments have been downgraded, the other time being in 2011.
Fitch cited the federal government’s growing deficit, now at $34 trillion, as one of the main reasons for the downgrade. The rating agency also cited factors including deteriorating confidence in the government’s fiscal management due to partisan divisions and repeated standoffs over the debt limit, higher interest rates, and the failure to address medium-term challenges related to government entitlement programs.
The government deficit continues to increase in 2023, and interest expenses are increasing $180 billion this year as the cost to service government debt has risen with the increase in interest rates. And Social Security, Medicare, and Medicaid entitlement programs are expected to continue to grow as the US population continues to age. These programs account for two-thirds of all government spending. Finally, tax revenues are down 10% so far in 2023, further exacerbating the deficit.
While the federal deficit is worrisome, the Fitch downgrade should not discourage investors from investing in CDs or Treasuries. The U.S. dollar remains the reserve currency for the world. There is global demand to own Treasuries. The U.S. economy is growing, 2.4% in the most recent quarter. Inflation is coming down. So overall the U.S. economic picture looks pretty good.
Many older adults have high levels of regret about their finances, according to responses to a 2020 survey of Americans over age 50 conducted by the University of Michigan Health and Retirement Study.
The survey found that nearly 60% of participants regretted not saving more for retirement. Forty percent regretted not buying long-term care insurance, 37% regretted not working longer, and 23% regretted taking Social Security too early.
Financial regrets may be common, but they don’t have to be inevitable. And even if you have regrets about how you prepared for retirement, these errors don’t have to be permanent. There are options for course correction, even after you’ve stopped working.
Here are four tips to help you avoid or mitigate financial mistakes in retirement.
1. Plan for long-term care expenses
One mistake that clients may make after retirement is not considering long-term care planning,
including the potential need for nursing home or assisted living expenses. These costs can deplete your assets and put a strain on your loved ones.
Someone turning 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years, according to the U.S. Administration on Aging. The average person requires care for three years.
You may want to explore options for long-term care insurance and create a comprehensive estate plan that addresses the potential costs of long-term care.
2. Account for inflation
Nearly two-thirds of retirees said inflation and the rising cost of living was the “biggest financial shock” in retirement, according to surveys conducted from January to March 2023 by Edward Jones and The Harris Poll.
Respondents cited inflation as a shock more often than the combined total of the next three top
responses — unexpected medical or dental expenses (22%), major home expenses or repairs (20%), and significant declines in the value of investments (19%).
If your earlier retirement planning didn’t account for high inflation, it might be time to re-examine your retirement finances.
3. Keep managing your investments
Whether it’s to deal with inflation or for any other reason, you might want to revise your investment and/or withdrawal strategies to help your money last in retirement. You should have a retirement income plan in place that matches your current lifestyle.
4. Prepare for surprises
Even with a good retirement income plan, your finances need to be ready to deal with surprises. Unplanned expenses such as a roof replacement or a large unexpected medical bill could cause problems.
Some of these problems might be harder to deal with now than in the past. Higher inflation means those unexpected expenses might cost more than before, while you’re also spending more on the day-to-day cost of living.
Plan to put some of your retirement income aside for unforeseen costs. An emergency fund of three to six months is generally sufficient to cover or defray these expenses.