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First Five Years

First Five Years

July 29, 2020

The article about “Why the First Five Years of Your Retirement are Critical” is full of important points that could be reviewed and discussed. I’m going to focus in on four. The first being that the five years prior to your retirement are arguably more important than the first five years of your retirement. Far too many people come to me the year they are going to retire rather than 5 or 10 years prior to retirement. The truth is that the longer you wait to plan the more you risk losing some of the options or strategies that could help you. Wanting to put together a plan for retirement in the year you are going to retire is last minute planning. What situation in life is made optimal with last minute planning?

The second topic I would like to bring up is one of risk. The years leading up to your retirement date and those first five are when you and your money are exposed to sequence of returns risk. Which is basically a drop in the market that happens right around the time you retire. I explain the concept of sequence of returns risk in my webinar. The results of a poor market at or around your targeted retirement date have a disproportionately negative impact on your nest egg’s ability to continue to produce income over the long-term. It’s a game changer for those that do not address this risk and end up suffering from it.

Point number three……The “4% Rule” needs to be discussed as a general rule of thumb. This is another topic I discuss in greater detail in my Webinar. One of the first things I mention is that this “rule” is surrounded by opinions. There are plenty of arguments for and against if the rule is still relevant or accurate. I see the 4% rule as more of a benchmark when talking about retirement income creation. Some people are simply not going to be able to live off of 4% of their saving and investments, and when that’s the case you either need to significantly change your lifestyle or develop and alternate strategy for creating income.

Lastly, the article’s focus was on the fact that most people spend more money in the first five years they are retired. They give two primary reasons for this. One, people are more active early on, looking to do “bucket list” items in those initial years. Two, people realize they can’t afford to keep spending like they were, or they will soon be out of money. Which in my mind brings up one of the more, if not most, difficult planning conundrums for advisors and retiree’s. How do you intentionally structure your streams of income? Do you want to intentionally create a plan that provides you with more income in the early years knowing you are spending money you may need later? Most plans are built around the assumption of level income adjusted for inflation, but what if that is not what you want? For many, there may not be an easy answer to this challenge. Yet I feel it should be an important part of the conversation around retirement income. Think about the life you want, build a plan to support that life, then build the portfolio to support then plan.