Journey Into Retirement

Retirement planning is a process that requires active engagement. In this blog post I will discuss three levels that I have witnessed among people approaching that stage of their life and how this could relate to your ultimate success. These three levels are Assumption-Based, Active Assessment, and Active Management.

Assumption-Based

As I have planned my own retirement and talked with others at various points in their career and retirement readiness, I have been astounded at how many people have not done even the most basic research. This may be well over 50% of the people who are within 10 years of retirement. This obviously was not a scientific survey, but just my casual observation. However, it has been fairly consistent.

What this means is that a large number of people have not determined what their retirement income and expenses will be. In addition, they have done no assessment of how long their retirement savings will last. Among this group, it is not uncommon to hear comments such as “I will be 80 years old before I will be able to retire.” However, the reality is that they really don’t know because they have not done even the most rudimentary assessment. Their statements are all assumption-based and most really don’t know. The reality could be that they could actually retire today and be OK. Or, the reality may be that they will need to wait until they are 90 years old. In actuality, everything is an assumptions with a lot of uncertainty.

This is a very passive approach to retirement and leaves a lot to chance. If you think that you will be 80 years old before you can retire, that is probably when you will retire, because you will not know any better. You are making assumptions that may or may not be true, but this will drive your retirement-related decisions.

Active Assessment

The next level of retirement preparedness pertains to people who actually have tried to do some assessment of their financial readiness. This is somewhere between 20% – 40% of people who are within 10 years of retirement. The critical question for people at this level is “where am I now.” These people have assessed the Social Security and Pension income that will be available. Some have done some attempt at predicting retirement expenses. An, some have assessed their retirement savings and have done at least some back of the envelop calculation of how long their savings will last. A subset of these people have gone on-line to some of the financial websites and used the retirement assessment tools that are available to get a handle on these issues.

The Active Assessment level of retirement planning is certainly necessary for successful retirement planning because it will help you determine where you stand. However, it is also a very passive level of planning. If you have reached the Active Assessment phase of retirement planning you have done a necessary activity to plan a successful retirement, but it is not sufficient to guarantee success.

Active Management

The final stage of retirement planning is the adjustment phase. I would guess that maybe 10% – 15% of the people I have talked with will have reached this phase by the time they actually pull the trigger on retirement. Active Management is a very proactive process. It requires you to go beyond assessment to active management of your financial readiness. To reach this level, you must have completed your active assessment so that you know where you are now. That is a necessary precondition. The key question for people at the Active Management stage of retirement planning is “what do I need to do to make this happen.”

There can be many elements to adjustment planning. For example, you might ask some of these important questions:

• How can I Increased my income in retirement? This may involve delaying your retirement date to increase your Social Security and Pension benefits. Or, you might think about part-time employment in retirement. There are a number of possibilities that you could contemplate all focused around increasing your retirement income.

• How can I lower my expenses in retirement? More to the point, how can I lower my expenses without decreasing my standard-of-living? You could think about ways to reduce your expenses directly. You might consider relocating to a city with a lower cost-of-living. Or, you may find ways to spend your money smarter.

• How can I ensure that savings will last for the duration of my retirement? You might consider increasing your 401k contributions while you are working. Another option would be to be more aggressive in how you invest your savings both before and after you actually retire.

There are several points to be taken from this discussion. First, if you are “failing to plan you are planning to fail” – a famous quote by Sir Winston Churchill. However, beyond this you may be depriving yourself of an enjoyable retirement, particularly if you are looking forward to entering that life stage. Second, actively assessing you situation as you approach retirement is a prerequisite to a successful retirement. It will not guarantee success, but it is a required step because first you need to know where you are. Finally, actively managing your situation makes the process proactive. Rather than letting the current situation dictate to you how you will live your life, you actively manage to the situation you are trying to create.

Whether you are able to assess and manage the situation on your own or whether you need to engage a Certified Financial Planner to help you is up to you and dependent on your level of expertise and comfort. However, an active approach to retirement planning is an absolute necessity!! Putting in the effort is well worth the expenditure of energy that it will require.