So, you're planning for the future and it’s time to start asking yourself all the important retirement questions: Will your grandkids do well at college? Will the fishing be good at the lake? Will this be the year you finally get to tour Europe?
And while these, and many others, may be high on your list, there are other pertinent retirement questions for you to be considering as well if you want to make sure that a comfortable retirement lifestyle is in your grasp. Retirement planning requires much more than simply figuring out how you’ll spend your time and effort. It’s important to consider the factors that will enable you to enjoy your hobbies and interests; getting answers to the right questions as you’re saving can help you plan for a more comfortable retirement.
As experts in retirement planning, our team at Fisher Investments is used to helping people (both before and after retiring) find the answers they need to plan for their sunset years. In our experience, we often find people focusing on the wrong questions or struggling to figure out the answers. We hope that by covering how to approach some of the most important questions, listed below, you’ll be able to use the information to take a more effective approach to retirement planning.
This is frequently at the top of any list of retirement questions, for obvious reasons. But it’s also one which, perhaps, needs breaking down. The truth is, that in order to answer this question, you need to have strong answers to a few others key questions first.
What Are My Retirement Goals?
This might seem obvious in the list of retirement questions, but it is amazing how many folks don’t adequately consider what their retirement goals are. We don’t just mean goals in dollar amounts, but also what an individual is looking to use their funds to accomplish. A successful retirement strategy depends on analyzing the investor’s goals and objectives to determine the cash-flow needs to support them.
Of course, specific funding goals will vary depending on your age; for example, a 40-year-old retirement saver will have different objectives than his 65-year-old counterpart. But the earlier you define your objectives and the more proactive you are in refining changes to them, the better you can plan for an enjoyable retirement. This will help determine the type of asset allocation that best supports your goals. The following are some key questions to ask when defining these goals:
How Long Will I Have to Enjoy My Retirement?
Once you know what you want to do in your retirement, you’ll need to determine how long you’ll have to support yourself during this time. While this topic can sometimes be uncomfortable to contemplate, it’s essential for developing an appropriate strategy. What you reasonably believe you’ll spend annually, multiplied by the remaining years in your expected lifespan (and that of your spouse, if applicable), is the core of what determines how much you’ll need to fund in retirement. If you intend to leave a family or charitable legacy, you will also want to factor in a buffer to help ensure sufficient assets remain, even past your projected time horizon. Whatever the case, it is prudent to take all of the following into account when considering this important retirement question.
Americans are living longer than ever before. From 1993 to 2015, average life expectancy rose every year and currently stands at 78.81 years (this is only median life expectancies; half of all investors can expect to live longer). Thus, a 60-year-old American can expect to enjoy around another two decades, meaning the “retirement years” can make up for more than 25% of a person’s life. Running out of money right at a time when you’re most likely to start needing additional care, medicines and specific accommodations can be brutal, so underestimating this time can pose a serious risk to your comfort.
Some personal considerations you can look at to better refine how you plan your time horizon include:
The Effect of Inflation and Expenses
After getting a sense of your time horizon, you’ll need to understand your cash-flow requirements to answer this most important retirement question. Effectively, inflation is the phenomenon by which a dollar today won’t buy a dollar’s worth of goods in the future, and it is amazing just how many investors fail to take proper account of its impact. It is important to note that the impact of inflation is tied to your time horizon, because the effects of inflation compound each passing year throughout your retirement. Think of inflation as a stealth fee, eating into your retirement funds’ purchasing power.
Underestimating the impact of inflation is dangerous. Inflation inevitably reduces purchasing power, erodes real savings and diminishes the power of your investment returns. As measured by the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI), inflation has averaged nearly 3%2 a year since 1929. If this rate were to continue, an investor who currently requires $50,000 to cover annual living expenses would need approximately $90,000 in 20 years and about $120,000 in 30 years simply to maintain their purchasing power!3
It’s important to note that the CPI measures inflation as a broad economic phenomenon across a basket of goods and services; its main purpose is to be used as a benchmark to set public policy. In reality, it is only a representation of inflation as most consumers are likely to experience it, and does not exactly mirror “text-book definition” inflation across the entire economy. For retirees, inflation’s impacts are likely to be much greater, particularly when accounting for their spending in areas like healthcare or college education for grandchildren, which have historically outpaced inflation.
Some key specifics to check on to help ensure you’re accounting for inflation include:
Out of all the retirement questions we get asked, the answer to this one is probably the easiest to boil down into one simple and familiar phrase: as much as possible, as soon as possible. Perhaps the biggest risk you face is investing too late or setting too short a time horizon in your retirement planning.
Fortunately, the Government has recognized the importance of encouraging people to save for retirement. There are a number of tax incentives that are designed to try and make it economical for you to start saving now. These include:
You may have noticed in the above information that we pointed out advantages for those anticipating higher incomes after retirement—and maybe you thought it didn’t make sense. How can you make more money when you quit work? But the fact is, early action can result in a 401(k) or IRA that essentially grows more through compounding returns than through your contributions. When you are compounding your returns, it mean that as the interest, capital gains and dividends from your earlier contributions are reinvested, they allow you to generate higher returns moving forward. The earlier your plan commences, the more your money is likely to work for you, and the more opportunities you’ll have to take advantage of this effect.
Determining which type of vehicle will best meet the needs driven by the answers to your retirement questions will depend on your personal situation, investment goals, career situation and time horizon. However, one constant is clear: Compounding returns makes it useful to start sooner rather than later.
Choosing what you should invest in (known in the industry as your asset allocation) should be determined by your investment goals and time horizon, as we’ve briefly mentioned earlier. Unfortunately, a more specific answer to this particular retirement question is generally not something to look for on the internet. This isn’t because it’s difficult to find valuable information on specific investments, but because it is important to fully understand how appropriate they are, given the rest of your financial situation.
It is simply not a good idea to mix-and-match mutual funds or securities based on performance alone, blindly hoping for the best. Doing so could lead to “heat chasing” that leaves you without sufficient portfolio diversification—a bad place to be if you’re in a bubble when it pops. Getting your asset allocation right requires an intelligent and informed understanding of all the trade-offs involved, so that the right mix of bonds, stocks, cash and other securities can provide the necessary growth to reach your goals without taking undue risks that might jeopardize them.
What is clear, however, is that there is some level of risk involved, regardless of how you choose to allocate your assets. For example, stocks have the highest historical returns of any similarly liquid asset class4, but they are subject to near-term volatilities. Bonds, in contrast, have lower returns, but are usually subject to less volatility in the near term. We believe that as much as 70% percent of potential returns an investor will see can be traced back to the asset-allocation decision alone.
No single class of asset can be considered safe or “best,” but having a sense of where your retirement plan is going from the outset will help you in finding the options that are best for keeping you on the safest path to retirement. From there, it’s a matter of helping to ensure your strategy is consistently aligned with any fundamental shifts over the longer term, while not deviating through fear or greed in the short term.
In the realm of retirement questions, this is a difficult one as there are a number of things that can trigger loss. There are the typical ups and downs that come with the economy: companies releasing strong or weak quarterly reports, federal interest rates shifting, new innovations shaking up existing markets. These risks are mostly outside any one person’s control, but diversifying the types of assets in your allocation based on a thorough analysis of the economic climate can help to control your personal risk.
One good way to counter these risks is to actively pursue the benefits of international diversification. Many investors tend to keep their money in businesses they are familiar with close to home. Just as an issue can harm one company’s stock price while sending another’s sky-high, sluggish economies in one country are often mirrored by booms in another. Holding foreign assets can help investors overcome the restrictions of the domestic market, thereby opening up the potential for returns even when the local economy is lackluster or falling.
There are also those self-inflicted risks you can create when managing your own asset allocation: overly risk-averse investing failing to keep pace with inflation, excessive fees caused by trading to jump on hot trends, and poor financial planning before retirement forcing early withdrawals. Dealing with these risks is at once both easiest and hardest for investors, as it all comes down to discipline. While it’s easy to commit to a plan that shows steady growth toward retirement goals, it’s much more difficult to remain calm and see that plan through when your actual retirement account is down 20%.
This is one of the key advantages of working with an investment adviser when dealing with questions about retirement. An adviser can help you decide whether you’re experiencing a temporary correction or an actual bear market that requires a strategic change.
By approaching these key questions honestly, you’ll be in a strong position to create a retirement plan that can get you to your goals. Still struggling with some retirement questions? Fisher Investments may be able to assist through our Private Client Group. We know that maintaining discipline while investing can be a challenge, particularly when markets are volatile. This is why our team focuses on providing unparalleled customer service—to help ensure we’re giving our clients the information they need to understand how their plan is moving them toward their goals.
Download any of our extensive retirement guides for more retirement planning tips, or contact us to request a consultation with one of our advisers.