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Stress-test your retirement planning: Goals

This is part 2 in our series on creating a retirement plan. In this article, we’ll discuss the changing realities of retirementand why it’s more important than ever to take the time to plan for it.

“If passion drives you, let reason hold the reins.”

The wisdom in this quote from Ben Franklin is obvious: Passion that is not rooted in reason is dangerous. Nowhere is this more true than when you’re planning for retirement goals.

Every department in every company has at least one of them—that employee who yearns to retire early. Most have a clear vision, something they want to do. Often it’s something physically demanding, which they stand a much better chance of accomplishing at age fifty-five or sixty than they would ten years later.

Some of these early retirees, however, have one objective only: Not to work at all toward any objective.

As we’re about to see, a passion for doing nothing can be dangerous indeed.

Gary’s Story: Not Planning for the Reality of Retirement

Let’s consider a hypothetical retiree. We’ll call him Gary. Throughout his working life, Gary had one goal—to make as much money as possible, save all he could, and retire early, just like his dad.

Gary didn’t think much about what he’d do in retirement, because he never made time to think about it, let alone to discover what his passions might be. He was committed to working like crazy until he turned sixty and then . . . just . . . stopping.

After working his way through the ranks at several other companies, Gary spent the last fifteen years of his career overseeing the IT department at a leading medical device company. He was charged with integrating, maintaining, and constantly upgrading the company’s tech infrastructure and functionality.    

Gary did his job well. He earned incentive bonuses for bringing projects to successful completion. Some paid in cash but most in the form of company stock. He worked sixty hours or more most weeks and spent his all-too-short weekends catching up on sleep, recharging for the next week’s marathon.

Gary’s dad happily lived off his pension after working for the same company all his life. Though he didn’t have a pension, Gary figured he’d be fine. He had paid off his house and put what seemed like a lot of money into his 401(k), most of it, like bonuses he received, in company stock.

What did he do for fun? In a word, nothing.

Unlike his dad, who was an avid golfer and traveler, Gary had no hobbies or interests outside of work. His failure to limit his work hours to something more reasonable prevented him from discovering a non-work passion or life purpose that he could pursue in retirement.

He worked such long hours that his sole focus was escaping the daily grind. He’d often tell coworkers that his dream retirement was doing “absolutely nothing.”

Gary followed his dream, and it quickly became a nightmare.  

In less than a year of doing nothing every day, Gary realized that a happy retirement requires defined objectives and a plan for reaching them, two things he’d never bothered with. If he had, his financial picture might have been as rosy as he’d imagined.

The Unpleasant Surprises of Gary’s Retirement

The cost of health insurance especially surprised him. By retiring at sixty, Gary needed to fill a five-year gap in coverage until becoming eligible for Medicare. Quickly escalating premiums put a much bigger dent in his 401(k) than he’d imagined.

To make matters worse, holding so much company stock proved costly as well, in the form of a larger tax liability than he expected.

Gary’s biggest mistake, however, was thinking his retirement would “just work out,” like his dad’s. Huge changes in how we retire—changes Gary never even considered—pretty much assured that wouldn’t be the case.

There has been a change in how we retire.

Retirement as It Used to Be: The Golden Age of the Pension

Back when your parents or grandparents were working, most people worked at the same company for most of their careers. That was really how pensions got started. Since people didn’t want to give up their pensions, they worked for the same employer, many for thirty or forty years, like Gary’s dad.

And what, you might ask, is a pension? If you’re not sure, you’re not alone. Pensions are quickly becoming a thing of the past.

Classified as “defined benefit plans,” pensions, throughout much of the last century, were the backbone of American retirement. For decades, large corporations and private companies retained employees by offering pensions.

Pensions helped retain employees.

The Disappearing Pension

Here’s how a pension works—or worked.

Employers told each employee, up front, how much money they—the employer!—would pay them annually, beginning at a specific future date, in return for their long-term commitment as an employee.

That payout was the “defined benefit” and was based on the “defined benefit period”—the length of service to which the employee agreed in advance.

At the end of that period—ten, fifteen, twenty, twenty-five years, or more—workers got the money the company had socked away for them in the form of an annuity, a guaranteed annual income in retirement.

No wonder pension plans helped companies keep workers, right? They were a real incentive for staying!

For many people who have entered the workforce in the past thirty years or so, pensions seem beyond belief. Few companies offer them these days, but as recently as 1975, 85 percent of private-sector firms did, according to the National Institute on Retirement Security.

Why have pensions gone away?

It depends on who you ask. Most analysts agree that the decline in pensions is tied to profound changes in the nature of work itself. Some consider pensions “golden handcuffs” for middle-class Americans, keeping them tied to the same company for years and years.

Of course, that thinking cuts both ways. Pensions handcuff employers, too.

Companies often underfunded their pension plans, believing the markets would perform better than they did. When that performance didn’t materialize, the company was still “on the hook” for the promised amount of the defined benefit.

During the economic bonanza of the post-World War II era, many companies gladly made the payout to ensure worker loyalty—but those days are gone.

Today, corporate profits are higher than ever, but Wall Street’s demands for consistent, predictably competitive earnings have forced companies to get their numbers and projections as precise as possible.

Variables like market volatility and life expectancy of employees simply loom too large in those calculations, and that reality has forced most companies to abandon or freeze pension plans. By 2013, just 18 percent of private-sector firms offered them, according to the Bureau of Labor Statistics.

Compare that to the 85 percent that offered pensions a generation ago, and it’s easy to understand why we see fewer and fewer clients who have worked for the same company for more than twenty or twenty-five years.

More companies offered pensions a generation ago, compared to today.

The baby boom generation is really the last to see that kind of long-term commitment to a single employer, and it’s a pretty safe bet that the current generation of workers won’t see pension plans making a comeback anytime soon.

Other Factors Irrevocably Altering Retirement

Besides the disappearance of pensions, two other changes have roiled retirement in recent decades: longer life expectancies and the fact that people are retiring earlier than ever before.

Together, these have diminished the value of another key retirement benefit that prior generations relied on: Social Security.

The Value of Social Security Then and Now

Social Security was established in an era where workers would devote their lives to one company and work until age sixty-five, maybe a little longer. Then they would take that nice pension we just talked about and, with a little luck, enjoy ten or twelve years of leisure before passing on.

Social Security was the icing on the cake; it provided the remaining income folks needed in order to fully enjoy their “golden years.”

Prior generations didn’t have a unique vision of how they wanted to spend their retirements; they really didn’t need one. People worked later in life and life expectancies were shorter. With only ten or twelve years in retirement, minimal financial planning was enough.

Many years of retirement call for careful planning.

We, on the other hand, can expect twenty, thirty, or more years of retirement. While this gives us opportunities our parents never had, it also makes careful planning absolutely crucial.

How We Retire Now

Today, we are far more responsible for our retirement’s success and for creating the income to pay for it. Not only do one-quarter of us hope to retire before we reach age sixty-five, but as we learned, many more of us actually will: nearly two-thirds!

One reason is that companies are offering incentives for older workers to step aside early and make room for younger, lower-cost employees. Another factor is the changing ways people are employed.

A growing number of industries are trending away from hiring full-time workers in favor of part-timers, flex-timers, and subcontractors to avoid providing benefits.

Chronic medical conditions are yet another reason we might retire earlier than we think.

Reasons for early-than-expected retirement

Meanwhile, life expectancies are going up across the board. Since 1980 the number of people 90 or older has nearly tripled.  

None of these factors were an issue for our parents and grandparents. For them, the combination of pensions, Social Security, and shorter life expectancies made retirement manageable.

Today, company-funded pensions—those “defined benefit plans” we just discussed—have become “defined contribution plans,” the 401(k), 403(b), and 457-type plans to which many of us contribute part of our pre-tax earnings. Today’s workers count heavily on such plans to help fund their retirements.

We now mostly fund plans ourselves.

This is a fundamental shift. In a single generation, we’ve gone from employers telling us what our payout would be—from plans they funded—to employers telling us what they will chip in to plans we mostly fund ourselves.

The company’s match or profit-sharing contribution (assuming they make one) is nice, and we’re foolish if we’re not taking advantage of it. But the responsibility for funding our retirements has shifted almost entirely onto us.

To formulate a plan that ensures you won’t run out of money in retirement, you first need to know what you want retirement to look like.

Know what your retirement will look like.

Picturing Your Retirement

Preparing for a happy retirement really comes down to just a few things.

First and foremost is your own financial comfort: having confidence in what you’re doing and knowing that you have a viable action plan that accounts for all the risks and bumps in the road that could arise during retirement.

The more confident you are in your plan, the more likely you are to stick with it.

Secondly—and this has nothing to do with finances—you need to figure out how you’re going to fill your time in retirement. You’re going to have a lot more of it than ever before. Every day is Saturday! You don’t want to just sit inside your house and watch TV all day.

Or maybe you do—but I’m hoping you want to get out, be around other people, and have fun. That means having what Gary, whom we met above, did not: a purpose.

On the flipside of that, too often I see people remain active for a year or two after retiring but then increasingly isolate themselves—sometimes without even realizing it.

How will you spend your time?

Just as putting together a financial plan takes effort, so too does staying active in retirement. The clearer your picture of retirement, the better your chances of living it. You need to think deeply about what will make you happiest. What do you want to do, to see? How will you spend the abundance of time you will have?

It’s not entirely about money, but money is certainly a key factor of any good retirement plan. You don’t necessarily need a huge nest egg.

In fact, some studies show that people with regular, predictable income during retirement—from sources like Social Security, pensions, guaranteed annuities—are happier than those with a huge chunk of money.

But however you plan to derive retirement income, you first need to sit down with your family or spouse and develop that clear picture. What will be your purpose in retirement?

Your financial decisions become much easier once you know where you want to go.

Decisions become easier when you know where you want to go.

Today More Than Ever, It All Comes Down to You

As we’ve discussed, the burden for funding retirement has shifted. Employers once provided generous pensions in exchange for long-term worker loyalty. Today, workers must set aside the money that will secure their financial futures.

We also know that the current crop of retirees wants more. Many expect to retire younger than prior generations, and they’re getting what they want, thanks to the changing realities of work.

Last, and perhaps most critically, we’re living longer than ever before. This means we’ll be spending more time in retirement than the generations that preceded us.

All these realities make careful retirement planning a must, not an option. Putting together a flexible, adaptive plan requires serious thought about what we want to achieve when our full-time careers have ended.

Careful retirement planning is a must.

Homework: Defining Your Ideal Retirement

The questions that follow will help you determine your purpose in retirement.

Some people find it helpful to take several days to think things over. Many different interests capture our imaginations throughout our lives; it can be hard to remember them all in one sitting. Sorting out those that might hold your attention in retirement takes real reflection.

Maybe you want to learn to play golf. Maybe you’re a scratch golfer already, and playing a round each morning is your idea of the perfect retirement. Perhaps you’ve always admired beautiful quilts and want to create your own, to be enjoyed for generations to come.

Or maybe you’ve always wanted to help others, and retirement is the time you’ve set aside for doing so. But where to focus your efforts—in your neighborhood, your city, your state, or in some other country?

Wherever your interests may lie, thinking seriously about the following questions will help you unearth the answers to them and prioritize their importance during retirement.

If as you work you find yourself wondering where the money will come from, remember, that’s the best reason for committing to formulate a financial plan!

But for now, focus on creating a clear picture of the retirement you want to live. Then we’ll work toward a plan to get you there.

Let’s get to it!

Create a clear picture of retirement.

Questions for Your Retirement Planning

  1. How do you currently spend your weekends? Could you envision yourself doing that most days?
  2. Do you have any hobbies that could take up significant amounts of time? Would these hobbies incorporate a spouse or friend?
  3. Is volunteering important to you?
  4. Do you have a vision for travel or spending part of the year in a different climate?
  5. Dedicating time to family is important. Do you see yourself filling free time with family more than in the past?
  6. Most people’s career required a lot of responsibility and they were heavily relied on. Now that you are retired, are you going to miss the feeling of being depended on?
  7. Imagine it is Tuesday afternoon and you are now retired. What comes to mind when you think about what you would be spending your time doing?
  8. Is learning or acquiring a new talent or hobby something you will pursue?

Next, read part three in How to Stress-Test Your Retirement Planning.

You can also learn more about Minnesota’s premier retirement planners, the financial advisors at Pine Grove Financial Group, or click below to contact an advisor today!

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