John Paulos, mathematician and author, put it quite eloquently when he wrote that, “Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.”
Those nearing retirement, or already in retirement, are currently experiencing a significant amount of uncertainty and insecurity. The top financial concerns for older Americans include doubts about the future of Social Security, accelerating inflation and the rising cost of living, and daunting future expenses like healthcare and long-term care. Retirement was never easy, but with longer life expectancies and increased complications, it seems more difficult now than it was in the past. How can you prepare for an uncertain future and feel confident enough to enjoy your wealth in retirement?
1. Understand where your income will come from
You may have a large sum of money in your retirement accounts, and access to pension and Social Security income, but how does that all translate into what your total income will be in retirement? And how much will be left over after factoring in taxes? The first step to mitigating uncertainty about retirement is to determine what your income will look like and where it will come from.
Project your retirement account growth through retirement, add in any fixed income, and estimate your future taxes. If you are unsure about the future of Social Security, see how much is available with your full benefits, a reduced amount, and if you received no benefits.
That’s what you’ll have available to spend in retirement. Does that sound like enough to cover your expenses or could you be facing a potential shortfall? It’s time to talk about your retirement budget.
2. Prepare a budget for all of your retirement expenses
Budgeting for all of your expenses in retirement is perhaps the key to mitigating insecurity about the future. It is much easier said than done. How do you know exactly what you will spend in the future when you can’t anticipate every single expense, much less how those expenses will change over time? Uncertainty should be part of your budget and plan.
Your retirement plan should not be designed to only succeed in a narrow set of circumstances. Stress-test your plan to see how it responds to higher inflation, to higher than anticipated expenses like long-term care or healthcare, or to lower than expected investment returns. If you know your plan is designed to withstand an uncertain future, the uncertain future will no longer cause as much worry and anxiety.
3. Make sure your plan is optimized
Optimizing your retirement plan to get the most out of every dollar you invested can go a long way in reducing uncertainty about your future. What does optimizing your retirement plan, specifically, look like? It could mean doing Roth conversions in lower income years before retirement to reduce the tax impact of pre-tax retirement accounts. It means withdrawing money from your retirement accounts in the most tax-efficient way possible, generally using taxable assets first in retirement, then pre-tax, and saving tax-free Roth assets for last (to maximize that tax-free growth).
Making sure your plan is optimized means getting a second set of eyes on your plan in the form of a trusted financial advisor. We believe an ongoing relationship with an advisor is often the best recipe for long-term success, and you can connect with one of our advisors by filling out our “Work With Us” form.
4. Recognize what is in your control and what isn’t
There are some really important factors impacting your retirement that are completely out of your control. They can feel difficult to overcome and unfair. Millions of retirees ended up retiring at the peak of the dot-com bubble, during the Great Recession of 2008, or during the once-in-a-generation pandemic at the beginning of this decade. If you are fortunate enough to avoid retiring during a major economic crisis, factors outside of your control will still have an impact on your retirement. Inflation and investment returns are the main culprits.
While you can’t control your investment returns or how the cost of living changes throughout the course of your retirement, you can prepare your plan, based on historical data, and build it to withstand what’s out of your control. Prepare for the possibility of lower-than-expected investment returns in retirement, or higher-than-anticipated inflation. You can’t control all of the factors that impact your plan, but you can design a plan built to withstand the uncertain.
We are currently living in interesting times, and the future perhaps feels more uncertain than it has in the recent past. However, it’s important to put our present uncertainty into historical context. As a society, we’ve gone through very uncertain times before. We will go through uncertainties in the future that we can’t even imagine today. As someone about three decades from retirement, give or take a few years, I can only imagine the factors outside of my control that could have an impact on my retirement.
By focusing on what you can control, you can gain a greater sense of security about the future. You may not know what inflation will look like when you retire, but you can know what your plan for it is, whether high or low. You may not know what your investment returns look like in retirement, but you know what historical averages are over longer periods of time, and you know how your plan will respond to periods of lower and higher returns.
Like John Paulo wrote, knowing how to live with insecurity is the only security. Designing a retirement plan to weather the uncertainties of our future can provide a great sense of security amidst the insecurity.
