Thoughts on Retirement

I once asked my brother, a radiologist, if he ever thought about retirement and he, in his laconic way, replied "Every day for 20 years."

After I stopped laughing, I realized that he was not talking about being unhappy in his profession (he wasn't) or unprepared in the disciplined saving that is required for most of us (likewise), but rather in the more existential sense of "What do I do then?" And Prudential just announced that 10,000 Americans retire every day!

Most of us learn to get the best financial planning advice that we can muster. And then we sort of go on autopilot while we are focused upon our profession, our family and the other important things in our lives until something happens. Turns out, about half of us do not retire in the planned way. Health issues, divorce and all manner of personal and professional catastrophes can instantly wreck a nice plan and send us back to the drawing board.

But even for those of us who muddle through, sort of as planned, we are confronted by some important questions that are not answered on a balance sheet. If retirement is really about managing transitions, the most important decision we have to make is what lifestyle will I pursue?

Tied in with this question is how will I think of myself as my identity as a practicing physician fades? Where will my new relationships come from as staff, patients and colleagues go off about their business? What activities will I engage myself with? Retirement has become a life mulligan for the first time in history. So what will we do with this unique privilege?

Studies show that people who planned ahead make the transition the easiest and end up the happiest. And this is not just about their finances, but also those who became engaged earlier in outside activities. Those who started living on weekends and vacation in a possible new retirement home to see if it was right for them. Those who started slow and went in stages. Now, I do know a few who just bit the bullet, quit and claim to be fine, but the group stats do not bear out their testimony.

And one thing that you do not want to have at this stage is regrets. Moving "back to where my friends are" can be an expensive and upsetting lesson. I know some of those, too. You also do not want to be shocked to learn that your home is really your wife's castle (for my generation that is). There’s an old saw that your wife says to you after your retirement, "I married you for better or worse, but not for lunch."

For the financial side, you have to shift gears from the saving and investment mentality to the budgeting and liquidity way of thinking. And that is not as easy as you think. My brother, for one, told me that that shift was the hardest part of the retirement process for him.

Your number one goal in retirement becomes maintaining lifestyle stability in the face of the waxing and waning of the financial markets. And to do so for the rest of your life even though you do not know how long that will be. Every poll shows that retirees' greatest worry is outliving their money, especially as those over the age of 85 is the fastest growing demographic in America. Ideally, I suppose, financial planning Nirvana would be to have your last check, to the undertaker, bounce.

That brings up a brief digression to the question of whether one should prepay for their funeral. For some, there is comfort in guaranteeing the final dignity, a hold-over from times and places of deprivation. But you do need to consider when giving an entity a lump sum now that it is a possibility they will go bankrupt or be subject to fraud in the intervening years.

Other alternatives include establishing a trust for your funeral, buying a dedicated life insurance policy or just making some earmark in your will. But with these you may lose some control, if that is important to you.

My wife once asked me how I wanted my funeral handled and I told her I wouldn't be around to care; she should do whatever comforted her. I said what I do care about is how I am treated while I am alive, but she was apparently less interested in that. Hmmm...

Back to the important issue: not outliving your money. If recent financial gyrations didn't convince you, smart plan or not, it has become apparent that there are no guarantees about safety, returns, inflation, etc., that will insulate you in the future. Still, a smart plan is the best that we can do and one is highly likely to sustain us.

Current probability theory (Monte Carlo simulations) tells us that a 60% bond, 40% stock (to protect against inflation) investment balance is 95% likely to last at least 30 years if you begin with a 4% withdrawal of the principle each year, and adjust upward for inflation in the years to follow.

Note that the financial markets’ rigors just before and just after you retire turn out to be the most important of all the years you’ve invested. The first years of retirement are critical to avoid losses that will cast a long shadow, because you won't have the time or income to rebuild. Returns for your last savings years are critical, because that is when your kitty will be at its largest and subject to the greatest gains to carry you through.

If you have planned, or have been forced, to retire at a time when the markets are in a trough, such as now, you'll have to watch the store even more closely. Spend less, work part time or simply delay retirement.

One strategy that financial planners recommend for lifestyle stability through varying markets is to put one to four years of living expenses in a liquid fund to bridge even the longest bear market. Then, after a good year, you can replenish your cash bucket.

Another recommendation is to "ladder" your bonds, a stepwise progression of due dates, to hedge against abrupt swings in bond rates that could jeopardize your situation. So you avoid buying all your bonds at once. And consider putting a major chunk of your stock allocation into shares that routinely pay a nice dividend, also for smoothness.

I will go into Social Security and commercial annuities another time. In the meantime, make a list of all of the questions that have arisen in your personal circumstances and don't just guess at the answers, get professional advice and be particularly careful about where you get it.