In this video we discuss four uncomfortable retirement truths no one talks about.

Across our many years operating in the financial space, we’ve seen firsthand how ignoring this critical retirement advice can derail even the best-laid retirement plans. 

That’s why we’ve decided to make this video  – to share four uncomfortable retirement truths that you need to hear, even if they’re not easy to accept.

 

Uncomfortable Truth #1: Your Retirement Spending Will Likely Change Throughout Your Retirement

Some households “live it up” and spend more than they anticipate as retirement starts to unfold. In 10 or 20 years, though, they may not spend nearly as much.

The initial stage of retirement can be expensive. The Bureau of Labor Statistics figures show average spending of $78,079 per year for households headed by pre-retirees, Americans age 55-64. That figure drops to $57,818 for households headed by people age 65 and older. For people age 75 and older, that number drops even further to $53,481.

Some suggest that retirement spending is best depicted by a U-shaped graph — It rises, then falls, then increases quickly due to medical expenses.

But a study by the investment firm BlackRock found that retiree spending declined very slightly over time. Also, medical expenses only spiked for a small percentage of retirees in the last two years of their lives.

While that sounds like good news, the reasons why some retirees did not spend their assets may be complicated.

Certainly some may have benefited from greater access to defined benefit pensions, more income replacement from Social Security, strong real estate appreciation and an investment market that generally delivered strong returns and high interest rates.

On the other hand, some retirees may not have spent their savings due to uncertainty, perhaps even hoarding assets at the expense of fully supporting the retirement lifestyle they might have enjoyed. 

This will lead us into uncomfortable truth #3 in a moment, but its important to consider what’s the best course for you. 

Your spending pattern will depend on your personal choices as you enter retirement. A carefully designed strategy can help you be prepared and enjoy your retirement, not live in fear of outliving your portfolio.

 

Uncomfortable Truth #2: The psychological shift from saving to spending is harder than most people anticipate.

Going back to that BlackRock study, In order to better understand why retirees either spent

down assets or held on to them, BlackRock conducted in-depth interviews and surveyed over 1,500 retirees. 

The research further validated the previous findings, namely these three things:

• Fear of ill health and associated costs in later life/retirement compels retirees to think they need to hoard their assets;
• The majority of retirees favored their view of “financial security” over maximizing spending; and
• Relatively few retirees even feel the desire to spend down their assets.

 

The accumulation mindset is deep rooted; Only one in four retirees plan to reduce their assets!

What’s more interesting is that JP Morgan-Chase did a similar study for 120,000 households who had between $500,000 and $5 million dollars in assets, and found that especially for higher-income families (so, people with over $1 million in assets), spending falls sharply for discretionary categories,  such as entertainment, food and beverage, and travel.

This comes back to that question of “Are you CONFIDENT you have enough money to live the lifestyle you want in retirement.”

And for a lot of people, there are those external factors that they CAN’T control – like knowing what healthcare costs are going to be once they retire – that cause them to be OVERLY cautious with their retirement savings.

It’s A Real Psychological Challenge You Might Face When Nearing Retirement.

The “what if” scenarios creep up and just PARALYZE your ability to spend a bit more on discretionary expenses – be it a vacation home, a trip with the kids and grandkids, or even just a few extra nights out for food and drink with friends.

It’s important to go over your essential expenses; things like mortgage, utilities, car payments, etc…

…and then also bring to focus a few external challenges that you CAN’T control, be it inflation, tax law changes or retirement rules, or stock market volatility. 

But when you then factor in consistently rising and possibly unexpected healthcare expenses and It’s no surprise that there might be a little voice in the back of your head preventing you from withdrawing from your retirement accounts – that voice repeating the constant “what if” scenarios:

“What if the stock market drops 20%?”

“What if my spouse has a sudden healthcare emergency?”

“What if they change my social security benefits or taxes or whatever?”

 

Now – Let’s add a positive “what if” scenario to that voice:

“What if… you could minimize the impact that those external factors have on your retirement lifestyle?”

 

If you knew there was a strategy in place that addresses each of those “what if” scenarios, would it help you sleep at night?

The Employee Benefit Research Institute (EBRI) found in its 2023 Retirement Confidence Survey that workers reporting they or their spouse have a retirement plan in place are more than TWICE as likely to be at least somewhat confident in their financial security in retirement vs. those without a plan (74 percent with a plan vs. 29 percent without a plan).

If you can make sure you have a plan set up that will ensure you will have the funds to cover those essential expenses, no matter WHAT the stock market does or congress decides to do with taxes – it helps alleviate those “what if” questions.

Once that big psychological barrier is broken, it gets easier to see that you can make systematic or regular withdrawals from your accounts and not feel any hesitations about it.

If you’d like help addressing your “what if” questions,  click here, where you can set up time with our team and express those concerns and start the process of developing a retirement plan that is right for YOU.

 

Uncomfortable Truth #3: Your risk TOLERANCE in retirement might not match what your portfolio’s risk CAPACITY has to be in order to have a high probability of success in your retirement lifestyle.

Now, what does this mean?

Risk tolerance pertains to an individual’s psychological tendency to embrace risk, while Risk capacity is more closely linked to the financial capability of your portfolio to withstand potential losses.

• Why is this truth uncomfortable?

Risk capacity is determined by objective factors like

• Income
• Assets
• liabilities and/or debts
• insurance coverage
• Dependents
• and time horizon. 

 

Unlike risk tolerance, risk capacity is not influenced by emotions or individual disposition, but rather by concrete financial circumstances and obligations.

It sets a factual number on the level of risk a person can afford to take, regardless of their willingness or desire to engage in riskier financial ventures.

The problem some investors face is that their risk tolerance and risk capacity are not always the same.

This can lead to investment strategies that may either overly stress your portfolio, or expose you to potential financial shortfalls.

But aligning your risk tolerance with your actual risk capacity requires a synchronized approach that considers both the emotional and financial aspects of investing. 

You need to find that sweet spot where you can pursue your financial goals without lying awake at night worrying about the risks involved.

This is where the value of working with a financial advisor comes in – a person who can not only use the tools necessary to figure out YOUR unique risk capacity, but also someone who can give you the professional guidance needed to keep you from making emotional decisions that will hinder your retirement portfolio.

A good financial advisor will help you with:

• Self assessment
• Balanced Portfolio Construction
• Regular Reviews and Adjustment
• Education
• Diversification

 

If you are nearing retirement and are uncomfortable hearing the truth about your portfolio’s risk CAPACITY because of your risk TOLERANCE, you could be setting yourself up for a tough time in retirement.

 

Uncomfortable Truth #4: Your Retirement Plan Is NOT a “set it and forget it” type of investment.

The world of retirement planning has changed, and the old tools weren’t built for today’s challenges.

Today’s world faces unprecedented challenges, and operates according to a new set of rules.

Interest rate fluctuations, high-frequency trading, high debt, market volatility, and geo-political threats all make retirement planning more complex than ever.

You Need a Fluid Strategy to Navigate Today’s Retirement Landscape.

But, managing Your Own Wealth In Retirement Can Be Overwhelming.

Choosing investments, research, and deciding what to sell (and when!) can take hours per day, and cause significant stress.

Travel, time with family, or simply enjoying things you didn’t have much time for when working; you should ENJOY your retirement, choosing to do what makes YOU happy.

Tax laws change, the stock market is always going to be discussed in the media, and the quality of your health is most likely going to play some sort of a factor in your retirement plan as you age –

– but by working with someone who focuses on helping you build something that helps prevent those things from having a major factor in your portfolio’s ability to live the way you want, now THAT is something that help with those internal “what if” questions…

 

Conclusion

Now that you know these uncomfortable truths about retirement, we want you to understand that this is generalized advice, meaning it may not be exactly what you need for your given situation.

So if you want our team to sit down and look at your exact situation and help you plan for a better retirement in the future, fill out your information below and book a free call. Until next time, take care!