Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

retirement

“Retire” versus “Drawing Down Assets”

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We have a lot of clients who work for municipalities. These folks often have the ability to “retire” at massively different ages than other folks. And that’s great for them. But it’s forced us to use different “language” when talking with clients.

A client (we will call Joe) is “retiring” this year at age 66.
A client working for a municipality (we will call Pete) is “retiring” this year at age 47.

Both will retire.  In fact, both will retire soon.
But two completely different approaches will be needed regarding retirement.

At 47, Pete may have another job lined up. That may come with a second pension, or a 401k, or just another stream of income that didn’t exist before. But it will (likely) be years before he needs to start drawing down his retirement account.

At 66, it’s a pretty safe bet that Joe (unless he is that type-A kind of a guy), will not be working. And Joe may not start drawing down on his retirement account at work right away, but he might. He will starting withdrawing funds from his plan soon.

Here’s the thing with Joe: even a 66 year old like Joe will need to be sure he won’t outlive his money. And if Joe has good health and a little luck, he could hang around long enough to bug his great grandchildren — 30 years.

But hold on… a 47 year old (like Pete) also needs to be sure he won’t outlive HIS money either. And if Pete has good health and a little luck, he could ALSO hang around long enough to bug his great grandchildren — for a long time. Possibly 45 — or even 50 — years.

Pete’s money will need to last an extremely long time.
Therefore Pete’s money needs to grow for a long time.
Does it makes sense for someone like Joe, age 66 to have the exact same approach as Pete, age 47?  Probably not.

Which is why we need to know if you plan on drawing down your assets in the very near future.

Around the office, we have learned NOT to ask “when will you retire” but rather, “when do you plan to begin drawing down.” There is a vast difference.

Planning for Retirement, Better to be Safe Than Sorry

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Retirees face several risks when planning for retirement. Some of the biggest risks retirees face are market risk (assets will decrease in value), inflation or purchasing power risk ($1 today might not get you the same amount of goods 10 years from now), business risk and interest rate risk. These all pose serious problems for retirees, but with the right plan in place these risks may possibly be mitigated.

Another risk retirees certainly should be planning for (but I’m not sure how many are), is longevity risk. Longevity risk is the risk that retirees outlive their assets. Life expectancy is only getting longer on average. This is overall a positive — because everyone wants to live as long as possible!

But the nuance here: as life expectancy rises, retirement assets must last longer.

The average life expectancy for a 65 year old male is 84.3 and the average for a 65 year old female is 86.6 according to the Social Security Administration website. Remember that life expectancy is simply an AVERAGE of when people of a certain age die. Some people wont’t live to their life expectancy while some people will outlive it by many years. It is impossible to predict where you will fall.

Running out of money while in the late retirement years is the worst case scenario for a retiree. What are you supposed to do then?  Unfortunately there is really no good answer to that question. This is a problem that can’t be solved after it happens — it needs to be prevented before it occurs.

There are several strategies to help prepare, so a retiree may not run out of money in retirement.

  • Plan for longer than the average life expectancy.  Many financial planning and insurance planning tools now build in an assumption that the person will live to at least 95 years old. Some even go as far as 120 years old! If a person dies with money left over, that money can be passed on to a loved one or left to a favorite charity.
  • Don’t flip 100% to defense in your portfolio as soon as you retire. A typical retirement age is 65 years old, give or take a few years. Meaning the retirement assets have to last for maybe another 30 years! During the early retirement years it would be wise to keep a portion of the assets invested in the market. This will also help to prevent against inflation risk.
  • Save more for retirement in your early years (20’s and 30’s). I fall into this category and can tell you from first hand experience, saving for retirement is on the back end of my priority list at the moment. But just know that the earlier you start to save for retirement the more time (compound interest) works in your favor.
  • Have a higher risk tolerance in your early years. Investing in the markets is scary. But there is no reward without risk. Higher risk investments make sense for younger investors because they have more time to make their money back in the event of losses. Taking high risks during retirement years is not advisable.

It may be tempting for a new retiree to splurge in their early retirement years. I understand the temptation; you’ve been working your whole life and you earned all this money. You should be able to spend it on whatever you please and enjoy the golden years. I urge retirees to think twice about behaving this way because it could seriously damage their financial future when it is needed most. Spending in retirement needs to be mapped out and adjusted accordingly on (at least) an annual basis. A retiree’s retirement assets are all they have to live on for the rest of their life. It’s far better to end up with money left over at the end of your life than to run out of it during retirement.

Retirees would be wise to live by the old saying, it’s better to be safe than sorry.

 

Do I Have Enough Saved For Retirement?

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Do I Have Enough Saved For Retirement?

As investment advisors, some variation of the question “will I have enough money to retire?” is almost always asked to us in meetings with clients.  Rightfully so because it is a VERY important question.  People work their entire lives towards retirement, and the last thing they would want to happen is to run out of money during retirement.

So how does one go about determining how much money they need for retirement?

The answer to that important question is different for everybody.  The difference comes in lifestyle choices and needs.  It would make sense for a person used to a more upscale, lavish lifestyle to require more money to live comfortably in retirement.

One general “rule of thumb” you will find on the internet for figuring out your retirement number, is to calculate what your monthly expenses are, multiply that number by twelve to get your annual number, and figure out how many years you plan to be retired.

If you plan to be retired for 25 years, and you only have enough money for expenses for 20 of those years, it’s safe to say you need more money.

Another “rule of thumb” for people at the point of retirement is to estimate to withdraw 4% of your savings per year.  Don’t forget about Social Security too!  While Social Security can play a crucial role in some people’s retirement plans, it should not be even close to the only piece of your retirement puzzle.  Banking on Social Security to keep you afloat in retirement is a risky game.  Once again, if after doing the math, you out-live your money, it’s time to re-think your plan.

The key words in that last sentence are “your plan”.  There are a million online retirement calculators that will help you determine a number to hit before retirement, but without a plan in place to practically achieve that number, what good is the number?

There is a common misconception about how to save enough money for retirement.  Let me clear this up: if you’re banking on the stock market alone to get your retirement savings to where they need to be, you’re making a HUGE mistake.  Investing can absolutely help a retirement account grow considerably over time, but it should not be the sole factor towards making your savings grow.  In fact, for people nearing retirement in the next few years, investing your retirement savings in the stock market might not be the best idea.

Putting your money into safer, less risky investments would probably be the smartest course of action.  After all, you wouldn’t want to lose some of your retirement savings being reckless in the stock market when you have little time left before retirement to make it back.  If you have a long time horizon before retiring (10+ years), the stock market is a great asset in your “retirement savings arsenal”, but shouldn’t be your only weapon.

Wouldn’t it be great if you could make a lot of money now, put it under your mattress for years, and take it out at retirement and be just fine?  Well, you could, but I’m not too sure you would be just fine.  One thing to remember is INFLATION.  A dollar today won’t be able to buy you the same amount of something in the future.  Taking advantage of the stock market when you’re young is a great way to help reduce the impact of inflation over time.

One more thing about the stock market.  When you count your returns on a year to year basis, I would recommend taking a look at your REAL returns as opposed to NOMINAL returns.  Inflation, over time, can eat away at your returns, so it is always important to keep the real return of your investments in mind when planning for the future.

Participating in workplace retirement programs is an excellent way to boost your retirement savings.  It sounds self-explanatory, but you would be surprised at how many people don’t contribute to their company plan.  Setting up a direct deposit from each paycheck is a great way to discipline yourself into not accidentally spending your retirement savings.  If you don’t see the money in your bank account, and it goes straight to your 401(k) at work, you won’t have the opportunity to spend that cash.

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Cash flow is another HUGE factor in retirement.  Not only do you need to figure out how much cash flow you’ll need during retirement, managing you cash flows properly now can SAVE you a lot of money for later in life.  Any excess cash on a monthly basis could be better served socked away in a savings account, or personal IRA account for retirement.

The first check you should write each month is to YOURSELF.  After determining your monthly expenses, putting the leftover cash away for retirement will add up over time.  People have this misconception that money isn’t worth saving if it isn’t a substantial amount of money.  Guess what?  That little amount you DO save, will compound over the years and add up to quite a bit.

Saving for retirement seems like a daunting task that’s too far away to be on the forefront of any young person’s mind, but with a little financial planning NOW, you could be saving yourself a lot of stress down the road.  Do your future self a favor, and start thinking about retirement TODAY.