Start planning long before you retire.
So many people work furiously all their lives and then stop. This is not a plan.
Life, Liberty and the Pursuit of Happiness after Full-Time work
The concept of retirement, a brief period of leisure following four decades of hard work before we shuffle off this mortal coil, is dead. First introduced by German Chancellor Bismarck in the late 19th century, and very much a product of the Industrial Age, retirement has run its course. It’s time to call time on this outdated notion – retirement has retired.
You’re excited, right? You’ve dreamt of this moment for over a decade; no more pointless office meetings, no more stupid emails from your over-promoted boss, no more ridiculous team- building events, no more 6am alarm calls, and no more strategy meetings full of ridiculous buzzwords like ‘leverage’ and ‘core competency’. Soon, it will be just the two of you and endless days spent playing with smiling grandkids, sunny morning son the golf course and leisurely walks on the beach with your loved one. Finally, your very own Utopian idyll.
But what if it isn’t? What if those things you have looked forward to all these years are not enough to sustain you, to fulfil you and to energise you? Was the good bishop right? Can leisure survive ‘constant wear’?
Work is more than just a source of income. It is a social life, a sense of utility and purpose. It provides dignity and pride, and self-esteem within a community. Prospective retirees list financial worries as their biggest concern. Actual retirees however, rate alienation as their biggest disappointment; loneliness, being cut off from former colleagues, missing their jobs, and feeling behind the times are the kind of issues retirees feel most keenly(Mitch Anthony, The New Retire mentality).
How will you replace all this?
The questions we ask ourselves become much more profound with age. In our 20’s, we obsess over what people think of us; in our 40’s we stop caring; in our 60’s we realise no one was actually thinking of us anyway.
With time fast becoming that most precious of commodities, ‘am I living the life I want to live?’ becomes the most profound question of all. Retirees focus more on their legacy; not just on ‘what do I want to leave behind?’, but ‘how do I wish to be remembered?’
Australian palliative care nurse Bronnie Ware chronicled the regrets of dying patients in her eclectic and intriguing book, Top Five Regrets of the Dying. She found five recurring themes;
At Stanford Brown, our area of expertise is in working with our clients to help them enjoy a rich and rewarding retirement. It’s also our passion. The following 10 rules are the cumulative knowledge of three decades of advising retiring Australians on the pursuit of life, liberty and happiness after full-time work. We hope you find something here of value.
So many people work furiously all their lives and then stop. This is not a plan.
You need to start thinking and planning at least ten years prior to retirement. Ask yourself these questions: What do I love doing? What inspires me? What am I good at? What knowledge have I accumulated that I wish to use or to pass on? A good place to start is to reduce your hours or even work in a consulting capacity before leaving for good. This buys you time to experiment. Seek out internships, part- time jobs, volunteer or start studying.
Do your homework!
Not just those bucket list places you’d like to visit, but experiences you’d like to have, skills to acquire, languages to learn, hobbies to pursue and relationships to rebuild. The following is a list of some of our favourite books to read and websites to peruse for ideas and inspiration on planning a successful retirement:
encore.org – a website packed full of ideas for second act (or encore) careers
The Big Shift by Marc Freedman, CEO of encore.org
How Will You Measure Your Life by Karen Dillon
The New Retirementality by Mitch Anthony
What Color is Your Parachute by Richard Bolle
Too Young to Retire by Marika and Howard Stone – (contains a smorgasbord of original ideas (101 in fact) to ‘start the rest of your life.’)
Before evaluating your Economic Capital, check your Human Capital.
What are your skills, your passions, your experiences, your knowledge? Increasingly, our identity is wrapped up in our work. What will you miss the most? What are your key strengths? Start with Gallup’s excellent Strengths Finder. It costs just $20 and will produce a detailed report on your strengths. It’s the best $20 you will spend.
Next, take the National Seniors Retirement Quiz. This quiz looks at your retirement preparedness in terms of three resource types;
Sounds simple, right? It’s actually fiendishly difficult.
Here, we’ll apply the first of our Rules of Thumb (planning is an art, not a science, hence Rules of Thumb are often far more useful than the 30-year projections the financial planning industry and its regulator insist on). First, determine exactly how much you spend today. Monitor your spending over a 12 month period and do not exclude ‘one-offs’, as they have a nasty habit of repeating themselves. A really good budgeting tool can be found at www.moneysoft.com.au
Then apply the ‘Retirement Smile’. Most retirees assume they will spend less in the retirement years. This, unfortunately, rarely happens. In fact, you are more likely to increase spending during the first decade, a time when you have your energy and your health. This is the time for travel, for exploration, for trying and doing different things. Assume your spending increases by at least 10%. The next decade will likely see a significant drop in spending (how many times can you visit the Pyramids?), followed by a surge in health-related expenses in the final decade. Assume the superannuation rules will gradually become less favourable and don’t forget the spectre of inflation, which will erode your standard of living over time. Allow plenty of room for error.
Another Rule of Thumb. Assume you will require investable capital of at least 20 times your annual spending if you wish to retire from age 65.
This will vary according to your age, your risk tolerance, whether your capital resides in a tax-free environment like super, and whether you wish to preserve the real value of your capital or gradually unit down. Do the kids really need to inherit it all?
Over the past 40 years, a relatively conservative, well diversified portfolio of stocks and bonds has delivered strong investment returns. However, in this case, past performance is most definitely no guide to the future. The reason is that interest rates are so much lower today and are likely to remain low for some time. This will almost certainly mean that conservative portfolios will produce a lower real return to investors than in the past. Stepping up your risk profile is not the optimal solution as it will lead to more volatile outcomes than you seek.
So what to do if there is a shortfall? Well, you can either work longer, work part time, spend less or take more risk. There is no magic bullet. However, you can be more creative. For example, you can sweat your existing assets harder by tapping into the sharing economy and renting your house on Airbnb. You could downsize your home, or you could take out a reverse mortgage and remain where you are. These products are now far safer than in the past and better regulated. In our view, they are the most underused yet value added products available to retirees.
In a research paper intriguingly entitled ‘If money doesn’t make you happy then you probably aren’t spending it right’, Professor Gilbert recommends the following spending principles.
First, buy experiences instead of things. We like experiences more because we get to anticipate and remember them, whereas the delight of a shiny new BMW quickly fades.
Second, spend money to help others instead of yourself. Gilbert argues that our happiness is enriched from our social connections and nurturing these friendships is a fruitful way to spend our money.
Third, buy many small pleasures instead of few big ones. One of the key findings of happiness research is the power of adaptation- we get used to the things we have around us all the time. Treating ourselves to many inexpensive indulgences is a neat way to provide regular bursts of happiness.
Fourth, pay now and consume later. Delayed gratification enables us to receive the benefits of anticipation.
We are innately dreadful investors.
We panic sell during market sell-offs, we buy during the good times, we anchor ourselves to prices paid for stocks rather than future outlooks, we develop an irrational aversion to losses and we overestimate our ability to beat the market. In their landmark study of risk taking behaviour, Daniel Kahneman and Amos Tversky established the axiomatic truth that losses loom far greater than gains. More recent research by Professor Eric Johnson of Columbia University has shown that retirees consistently display hyper-loss aversion. They were up to five times more loss averse than the average person.
One iron-clad method to overcome your behavioural biases is the Odysseus Strategy.
Homer’s Odyssey describes the adventures of Odysseus during his return from the Trojan War. His biggest challenge was navigating his ships past the Sirens. These were dangerous, yet beautiful creatures who lured nearby sailors with songs so haunting that they would throw themselves overboard just to get closer to them. Odysseus was aware of his behavioural biases and planned accordingly. He wanted to hear the Sirens but knew that their songs would be too much even for him. So he ordered his men to put bee’s wax in their ears and tie him to the ship’s mast. As they passed the Sirens, he could hear their beautiful songs and tried desperately to untie himself. But the men ignored his pleas for help as he had forbade them to untie him. By knowing how you will react when markets get tough, you can avoid making costly mistakes.
Working with a good financial adviser will provide you with a retirement framework and the discipline to stick with the plan.
Index manager Vanguard, in this research paper entitled ‘Quantifying Vanguard’s Adviser Alpha’, argues that good financial advice will add as much as 3% to investment returns through effective asset allocation, behavioural coaching and wealth management advice. So how to find a quality financial adviser? The excellent article, ‘Seven Questions to Ask When Picking a Financial Adviser’, (no subscription required) from the Wall Street Journal provides a comprehensive checklist of questions to ask your prospective financial adviser.
Ok, so that’s the financial side done. You’ve planned ahead and run an inventory check, you’ve written down your Odysseus Strategy and pinned it to the fridge, you know what you will spend, and you have enough capital to last. Now what? What will you actually do?
‘You know you are getting old when you stoop to tie your shoelaces and wonder what else you could do while you’re down there.’ George Burns, comedian (b.1896)
At Stanford Brown, we send many of our clients to specialist retirement coaches, who work with the individual and their spouse to map out every aspect of their Retirement Plan. Start with the Retirement Goal Heptathlon of Health, Family, Work, Legacy, Giving, Home and Self. Prioritise these goals and figure out when you want them to happen. How will you measure a successful retirement? This is such a massive subject, that it is worthy of an article to itself.
According to Encore.org (a think-tank focused on baby boomers, work and social purpose), nearly 9 million people aged 44 to 70 are engaged in second-act careers.
Says Mark Freeman, CEO of encore.org and author of The Big Shift, “There is the financial question of how you will support yourself, and then there is the existential question of who you are going to be.” Some retirement trends in the US include;
We hope we have given you some food for thought, and we wish you the very best of good fortune (and good planning). Say bah humbug to that old curmudgeon, Mr. Hemingway, and tell him to stick to fishing trips in Cuba.
We’d like to leave you with one final thought. For just one brief moment, reflect on your enthusiastic yet naïve 18 year-old self, leaving school and entering the big wide world for the first time. What regrets do you have? What did you not get to be? What is still left to do? Life is not a dress rehearsal. You still have time.
We wish you the very best of good fortune (and good planning).
Download the ‘Ten Golden Rules of Retiring Retirement’ PDF here.