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By Doug Dahmer
Special to the Financial Independence Hub
How much is enough? This is the number we all want to know as we strive to determine how much needs to be set aside to fund our aspirations for freedom of life after work. The industry’s tool of choice, to answer this question, is the retirement calculator.
While these calculators provide a rough guideline for those early on in their accumulation years; once the count down for retirement begins (around ten, nine, eight years before retirement lift-off), you need to shift your attention from the rough guestimates of retirement calculators to a more disciplined planning process. Failure to do so robs people of the retirement they dream of and keeps them from achieving the security they deserve.
Reality Oversimplified
I recently re-watched the movie Apollo 11: a film that focuses on the spaceflight that first landed humans on the moon.
While Commander Neil Armstrong and pilots Buzz Aldrin and Michael Collins garnered most of the headlines, as I watched the mission unfold, it occurred to me that the unsung heroes of this mission were really the 100+ engineers back in Cape Canaveral. These were the people tasked with planning and then monitoring every single detail of the flight.
Complex? Unquestionably. Yet, this mission did have a pre-planned duration (8 days), a known destination (the lunar surface), a highly-researched flight plan and the ability to pre-determine fuel consumption: prior to lift-off.
Those approaching or currently living in retirement should be envious of the simplicity of this type of mission. Why? Because baby boomers face a much more daunting mission. A journey of unknown duration (often 11,000+ days), to an (all too often) poorly defined destination, along an uncharted course (Baby Boomers are redefining retirement), while constantly worrying and wondering if they will run out of fuel (money) before their journey’s end.
Unfortunately, the guidance system offered by the financial services industry is based upon the simple math of retirement calculators. Google “Retirement Calculator” – you will find every financial planning institution has an on-line version readily available.
Each of these retirement calculators use the same rudimentary approach. They are designed to solve the simple math of a straight-line equation. They each ask the same six basic questions and provide the same six basic solutions to solve for a quickly and poorly defined accumulation number.
Typical Questions:
- How old are you?
- When do you plan to retire?
- How much do believe you will need annually to cover your retirement lifestyle costs?
- What are the current balances of your investment accounts?
- How much more do you plan to save in these accounts, prior to retirement?
- What rate of return do you think you will earn?
Typical Solutions:
- Work longer (which may or may not be negotiable)
- Save more (sacrifice more of your current life plans)
- Spend less (sacrifice more of your future life plans)
- Take on more investment risk (increase your stress level)
- Die sooner (doesn’t sound all that attractive)
- A combination of all of the above
Answer Sought:
A regularly recurring income stream (usually a percentage of your current income) that you will not outlive.
The underlying assumption of these calculators is that the successful funding of our retirements is about the delivery of a recurring constant cash flow on an annual basis. This thinking is a carry-over from the retirements of our parents’ generation. Most of our parents lived their retirement lives trying to budget their retirement expectations within the inflexible limitations of their monthly recurring defined benefit pension entitlement, their Canada Pension Plan and Old Age Security. The flexibility of adding some spice to their retirement lives came from the little bit they were able to accumulate after covering the non-negotiable deduction from their pay cheques to help fund their company pension plan. The simplicity of these retirement calculators was adequate for our parents’ needs, but not ours.
While numbers don’t lie; they often tell only half of the story
Baby Boomers, out of both necessity and desire, are in the process of redefining retirement. We lack both the security available from, and spending limitations imposed by, a defined benefit pension plan. As opposed to a recurring pre-determined monthly pension income: we retire with a lump sum from which to source our required annual cash flow. We are blessed with the freedom of adjusting the amount we draw from our accumulated savings to align with the timing and price tags of the choices of our desired lifestyle.
However, this huge benefit of funding freedom, comes with an associated obligation. The responsibilities that prior generations relied upon pension plan managers to take care of, have now been delegated to us. If we are avoid outliving your money: it is up to us.
Over our anticipated 30-year retirement journey we will pass through three distinct life stages: our GO-GO Years, our SLO-GO Years, and our NO-GO years. The annual amount of cash flow required during each of these stages, and where the money will be spent, will vary significantly. Our task of cash flow planning will be further complicated by years where the roofs on our houses will have to be replaced, the purchase of replacement vehicle(s) will become necessary, and the desire to fund one of those big-ticket vacations on our bucket list arrives.
There is a high likelihood that the value of our current home will factor into our retirement cash flow plans. This complex mathematics is well beyond the capability of the common retirement calculator. So, beware if the person helping to build your retirement plan asks: What is the recurring income stream you think you will need to fund your desired retirement. This is your clue that a retirement calculator is about to be used.
Retirement Planning is Rocket Science
If all we needed to know to get a man to the moon was how many gallons of rocket fuel is required to travel the return trip of 953,054 miles, the 100+ engineers would not have been needed.
Those 100 aeronautical engineers were not watching the needle on the fuel gauge. Their job was to follow the course of the rocket throughout the journey, relative to trajectories planned long before take-off. When necessary (frequently) their responsibility was to provide the course corrections that would allow the astronauts to successfully complete their mission.
As we get closer to the launch date of our retirement, it is time to put away the retirement calculator and start charting the course of our desired retirement journey: What do we want to do?, When do we want to do it? and How big do we plan to do it over the remaining years of our life?
Embrace the Reality of Variability
This key lifestyle information identifies how our year-to-year spending will vary. The associated peaks and valleys in spending provide the clues for the “financial engineers” to determine how to make our accumulated retirement nest-egg work harder and last longer. Their responsibility is to provide informed direction as to which account types need to be topped up during our final years of accumulation.
The right choices are keys to provide the greatest flexibility for tax planning. It is our specific life plans that allows them to diagnose and prescribe when we should start to collect our government retirement benefits such as Canada Pension Plan and Old Age Security: not to mention how soon to convert our RRSPs to RRIFs and at what pace to draw upon these savings. It is the forward knowledge of how much money is needed and when, that allows them to solve the complex puzzle of building a year by year recipe that draws down on your savings in the most tax efficient manner.
Bottom line, it is time to put the simple math provided by retirement calculators away. It is time to dig in and start defining the retirement life you want.
Almost 30 years in this industry have taught me three key lessons:
- It is the people who know what they want who usually get what they want.
- The more good choices we make, the better our lives will be.
- It is those people who take the time to chart their life journey, to achieve the things they want, who tend to make better choices.
Doug Dahmer is the founder of Retirement Navigator (www.RetirementNavigator.ca) a fee-for-service Retirement Income Planning Company. He is also the creator of the do it yourself financial-life-planning software Better Money Choices. (www.BetterMoneyChoices.com)
