Making Your Assets Last Longer
I think we all worry about whether we will have enough to do the things we want to do as we approach retirement age. The “enough” can be money, time, or energy but I’m going to focus on money in this segment. These concerns have been heightened in the last few months as we see rising inflation along with a market that has been volatile. To top it all off, experts suggest that more of us will live longer than we might have expected when we were younger. I can understand why many are worried about outliving their resources. So, what can we do? Here are five ways to better prepare yourself as you get older.
- Know what you need
- Align investments with need
- Build in cushion for the unexpected
- Plan and forecast
- Explore insurance to protect against potential long term care needs
Know what you need
Understanding how you spend now is the start of the journey to forecasting what you will need later. Start with current spending and adjust for the current spending that you won’t have later and add for things you want to spend more on later. For example, if you still have children at home, there are likely entire categories of expenses that will disappear once they are on their own. For an additional spending allocation, there might be travel that you want to do once you have more free time. You should be realistic about how you might spend as well. For example, when we plan with clients about future travel, we try to estimate the spend based on their likely periods of high energy, lower energy and low energy. Your spending assumption may be different for each category. I also suggest spending time to think about that which really bring you joy and focus your spending in those areas. If luxury cars are a “nice to have” but don’t really brings you joy, budget for a lower spend on automobiles which may give you more resources for the important areas. Make sure to plan to spend the appropriate time thinking about your future spending. I have joked that people will often spend more time researching a new washing machine than they do in planning out their lives.
Align your investment strategy with your needs
Risk and return expectations should align with what you need and not just an attempt to accumulate the most money. Keep in mind, if return expectations are higher, usually the risk is too. Misunderstanding the risk, you are taking can quickly derail a plan. I’ll also add that if your investment horizon is long-term, you should not overreact to current market developments. In the short-term, financial markets are quite unpredictable and their volatility is high. However, when looked at through the lens of a long-term investor, the US stock market has a strong upward bias. The tendency for the US stock market to increase has led to a return that averages 4-7% above inflation on an annual basis. Not taking advantage of such a strong long-term trend is not advisable.
Build cushion in spending and cash
Sometimes, I’ll hear people speak about assumptions and projections as if they are certainties. As we all know, very few things in life are certain and we should remember this when thinking about our finances as well. We recommend building cushions in both spending and cash. With respect to spending, try to add an extra 10% or more to your spending assumptions because there are typically expenses that were unforeseen when we build out our spending model. Also, building a cash cushion provides comfort and resources for when those unexpected needs arise. Financial planners have a general rule that you should have an emergency cash fund of six to twelve months of spending. But each person’s circumstances and emotions are different so some may want to reserve more, and some may want to reserve less than six months. The key is to think about what is proper for your situation and then work to build that reserve.
Plan and Forecast
I can’t emphasize enough how important I believe it is to plan. But it may not be for the reason you may be imagining. Most of us think of planning as an exercise to determine the path we need to take, such as planning a route for a trip. In that trip planning, we have facts, and we use those facts to plot our course. For example, if I need to drive from DC to Baltimore, I know where I am and exactly where I need to be and can map out the exact route. For our lives, planning is very different because we have only some facts. We know what we own, what we earn right now, and what we spend right now. We must make assumptions about future earnings, rates of return, and spending . . . over a very long period. One thing we can say with certainty when having so many assumptions over long periods is that our reality will likely be much different than our plan. If this is the case, why should we plan at all? The role of the plan is to test out a set of assumptions and understand what is possible but more importantly, to create a framework for making decisions as our circumstances change.
Explore insurance to protect against potential long term care needs
While there are many things that we can do to prepare ourselves for success, we also have to think about those things that can quickly derail our careful planning. Medical advances have made it possible for many to live longer lives, but with longer lifespans comes the possibility of greater long-term care needs. The cost of medical and health care as we age is getting more expensive so everyone should explore what kind of care they might need and the types of insurance that would provide a benefit to you if you do need such care. My colleague, Kevin Ostergaard, wrote a commentary on the topic called Why You Should Consider Long-Term Care. All of us need to prepare ourselves for the possibility of such needs and explore the cost/benefit of obtaining insurance as protection.
Concerns about saving enough to last a lifetime have created new levels of stress and anxiety. The time and effort that you expend in planning for the future is well worth the clarity you’ll have at the end of the process. I hope that these five tips will help you to better prepare for the future.
Written by Bob Len, Managing Director