Journey Into Retirement

This post is the second in a series applying what I have learned working in business to retirement planning.

Experience: that most brutal of teachers. But you learn, my God do you learn.
C.S. Lewis – Famous Writer

Lesson #2: Use information for guidance, not confirmation

This is a lesson that gets reinforced all too often in business. When you do marketing analysis for a living like I do, you tend to run into two generic kinds of people. There are those who truly want you to provide guidance and will consider the information, regardless of what it says. These people are the enlightened because they are truly looking for an answer and have no preset agenda. On the opposing side of the spectrum are people who already have made a decision. They just want you to provide confirmation. For these sorts of people, if the information doesn’t confirm the decision they want to make, they either reject the analysis or intentionally misinterpret the results. Mostly, these people think that they are too smart to be wrong.

Now in retirement planning the problem is not so much that people think that they are too smart to fail. Rather, they know what kind of outcome they want and just want the data to tell them that is what they can expect. It is more wishful thinking than anything else. However, here is the rub: reality is reality and rejecting an inconvenient truth will not help you succeed in retirement. It will bring momentary happiness, but longterm grief. Believe me, reality can be great teacher, but a cruel master.

Here’s how it all plays out. You want to know that your pending retirement situation will be positive. That is, you want the best outcome. It is just human nature that you would feel that way. The best way to ensure that you get a good answer is to use rosy inputs in your planning so that the results you get from your analysis will be positive. What do I mean by this? Here are some examples:

1) Lowballing the estimates of inflation. For example, if inflation over the last couple of years has averaged 2%, assume that this will continue indefinitely. Don’t use longterm historical averages because this won’t give you the answer you want.

2) Assuming an unrealistic investment return on your savings given the economic situation and business uncertainty. For example, assuming that you are really good at picking investments so that you can expect to be at the high end of what others are getting.

3) Being overly optimistic about the percent of pre-retirement income you will need. For example, you assume you can live on just 50% of your pre-retirement income when the actual number is closer to 80%

4) Underestimating your potential lifespan, the amount of time you need to plan for. Look in the newspaper obituaries and you will find people who died at a fairly young age, but others that lived beyond 100. You need to assess the possibilities and hedge your bets. Average lifespans are just that. Some people have shorter lives and some longer. Plan for the average then add some years to be safe. If you live only to the average, your heirs will thank you.

5) Overestimating post-retirement earnings. For example, you plan to start a home-based business that you are certain will explode into a multi-million dollar company in a couple of years. OR, you are having health issues, but still expect to be able to work in a physically demanding job post-retirement. Even a Walmart greeter can be a physically challenging job. It puts a lot of stress on the wrist “waving” and facial “smiling” muscles.

These are just a few examples of assumptions that can make retirement planning look better than is realistic. I am not be trying to be negative here, but just noting that there is a natural tendency to be overly optimistic because you want things to work out for the best. You know what answer you want to hear. You don’t want to struggle in retirement. This should be a time of peacefulness. So, it is “feel good” to hedge the assumptions a bit.

However, this is not the answer to retirement success. The answer is to seek an honest assessment of the situation. This provides understanding and feedback so that you will know whether you will need to adjust. As I have said before, it is better to be pleasantly surprised by a more positive outcome than you expected than to be rudely awakened by a much more negative situation.

There is nothing in the tools offered on this blog that will prevent you from being mister or madam sunshine. If you assume that inflation will average 0% for your 20 or 30 years of retirement because that is what it was last year, the tools will joyfully make the calculations based on that input. If you think that you will get a 30% annual return on your investments, the tools will cheerfully complete the calculations using that assumption. It is up to you to be critical and to adopt the proper perspective. You will have less ability to adapt if your assumptions are overly optimistic and you may be blindsided (not a good thing).

By the way, in regard to those people who are seeking confirmation for decisions they have already made – some succeed shortterm, but few succeed longterm. For me, that has been confirmation for the need to be honest! As I have said, you ignore reality at your own peril.