Are You Prepared For The Certainty Of Uncertainty In Retirement?
When planning for retirement the most common fear is that of uncertainty.
The uncertainty of income. The uncertainty of investment markets. The uncertainty of life.
These are common concerns and I recently experienced this with Jack & Mary, new clients.
Meet Jack & Mary
Jack & Mary came to see me after being referred to me by a current client.
They wanted to get serious about making sure they were on track to retire comfortably.
They were about five years off retirement and they’d been prudent with saving into their super so far. They had a built up a nice size nest egg in super however had little in the way of cash reserves.
Jack & Mary had worked hard to date but wanted to make sure they did all the rights things so they could live a comfortable retirement, nothing flash.
Like most clients we see, they wanted to make sure they were able to meet they were able to maintain their lifestyle in retirement free from worry.
Other than covering their day to day living expenses they wanted to travel every year for the first 10yrs of their retirement at a minimum & change their car every 10 yrs.
Their family and grandkids were important to them so they wanted to have enough so if they wanted to they could help their kids and grandkids out. Nothing outrageous, just normal.
While we were discussing what they wanted to achieve in retirement, we were discussing their current position and noticed that their cash levels were surprisingly low.
So we discussed this a little further.
As the conversation progressed Jack & Mary opened up to us and we found out they had gone through a significant amount of grief in the previous year.
They’d had a parent that was placed in a nursing home, and another family member unexpectedly passed away.
This was a tragic year for them and a very stressful one at the very least. I really felt for them.
It became clear that the family member that passed away didn’t have a lot of money.
So Jack & Mary had to raid their savings account to the point they had to borrow money to fund the funeral costs and a number of other expenses relating to the funeral. It was something they had not anticipated and was such a shock.
I really felt for them. Not only did they suffer a great loss, and if the year of events combined wasn’t stressful enough, they had to borrow money from the bank to cover a significant unexpected cost.
They didn’t want to experience this type of discomfort again.
One of the strategies we put in place for Jack & Mary which is something we implement for all our clients was to help them build up an emergency account.
We put a plan in place a plan that over the coming years they would build this emergency account up to at least 6mths of yearly expenses.
Having this emergency, while simple, many neglect.
They have the knowledge that if something comes up they are well prepared.
For our clients, we prepare them for the certainty of the uncertainty, pre-retirement and in retirement.
Are you prepared for the certainty of uncertainty?
What Do We Mean By Uncertainty?
Uncertainty are events that are out of our control, we cannot see them nor can we predict them, it’s the future, and in most cases, we’re blind to them unless you’ve traveled that path previously.
For the most part, most of us have not.
I’m lucky to be in the privileged position where I have assisted hundreds of people over the years through the work that I’ve done for clients and have seen just about every conceivable situation occur. We help our clients prepare and plan for an uncertain future.
How would you feel knowing that if unforeseen events occurred you have levers to pull to sail through the uncertainty?
So What Are Uncertain Events?
Some of these uncertain events could be unexpected funeral costs that you’ve got to pay for. Perhaps you have a loved one that has passed away that don’t have the financial resources to be able to fund them.
It could be a son or a daughter that goes through a divorce and you’ve got to help them out to get them reestablished financially.
It could be an unexpected medical expense that perhaps is not covered by your health fund or Medicare.
It could be that something happens to your house that you need to urgently fix.
It could be a recession.
It could be bad investment markets.
Any event that is uncertain that we don’t know about.
How would you feel knowing that if you experience uncertain events you are well prepared and positioned to have levers you could pull should the circumstances arrive.
If they don’t occur, then you’re in a far stronger financial position.
My question to you is how would you feel about that? Is being prepared for uncertain events important to you?
How Do We Prepare for Certainty of the Uncertainty?
We implement a three-step process for all our clients and I would suggest that if you are serious about getting your finances in order that you follow the same system.
The first step is making sure that there are adequate cash reserves in place. We call them emergency accounts.
For most, we aim for around six months of income or expected income for that year be held in an emergency account. Whether you’re working or in retirement it’s the same equation we use.
However, it can differ depending on people’s circumstances. For instance, if you’re employment is perhaps uncertain and the income flows are inconsistent, this would alter the amount you retain in an emergency account.
For example, for Jack & Mary, we spoke about earlier, one of the actions we helped them with was a plan of action so they can build up those cash reserves to a point where they have at least six months worth of income sitting just in cash reserves they access at any point in time. Now, this could happen over a year of a number of years depending on their cash resources and commitments.
It’s the peace of mind that when something happens you don’t need to think about where the money’s going to come from. It’s available when you require it.
How do I protect myself against uncertainty?
The next step is particularly important for people not far away from retirement.
We want to have a good idea of what their future capital expenses are going to be for such things as big holidays, caravan purchases, new car purchases, updates to the home, whatever it may be.
Any planned expenses for the next 12 to 24 months.
If they are on the horizon, then we plan to hold that money or at least work towards getting that money into extremely conservative investments or cash. We would generally use cash and depending on the timeframes perhaps term deposits. Something that is relatively safe.
This protects you from what we call sequencing risk.
Given we don’t what investment markets are doing in the near future, we ensure our clients are able to live the lifestyle that had planned free from worry about investment markets impacting their ability to live their dream retirement.
It’s the timing of your retirement and the impact of subsequent market corrections on your plans. Think back to the Global Financial Crisis. May who retired at that time and didn’t have the adequate planning in placed suffered massive losses when they needed to access their money.
For Jack & Mary, we mapped our their expected capital expenses for the next 30yrs or so. That way we know exactly what needs to be help back to ensure their lifestyle and dream retirement is maintained.
However, this is not set and forget. We find that plans iterate over time and need to be adjusted. This is one of the action items we will review in their progress meeting. Constantly iterating and course correcting. We know it has to be a plan that can change with Jack and Mary over their life.
There are ways to protect yourself from these events. We don’t want that happening to you.
How do I protect my income in retirement?
Finally, when you are retired rather than accumulating assets you are drawing on them to fund your lifestyle.
In most instances, you don’t have the opportunity to return to work to make up for bad markets and build them back again. My guess is you wouldn’t want to go back to work once you are retired, right?
The strategy you implement when you are drawing on your money in retirement is very different than when you were accumulating it.
No longer are you trying to maximise the return you receive, you are wanting to make sure you are able to live your dream retirement without taking on massive amounts of risk, right?
I doubt you would be keen to downsize your lifestyle, right?
Once you have built up your cash reserves to six months worth of expenses, the next 12-24mths worth of capital expenses are held in cash. The next step is to ensure you have your regular income protected.
We are all about protecting our clients from the blindside, events they can’t see coming.
Given the unique way that we invest for clients, that is a simple investment portfolio based on the minimum level of risk to get the job done. While some clients will due to their experience take on a little more risk than is required.
We ensure there is at least 2 yrs worth of income in cash/term deposits.
We had this in place for clients prior to the Global Financial Crisis and it allowed our clients to maintain their lifestyle through a very difficult time. They did not need to sell investments that had suffered huge declines (in some cases up to 50% declines) to fund their income.
Given we had income flowing through the investment portfolios, very few of our clients had to sell any growth investments to fund their lifestyle. We know this stuff works.
While some made a decision to cut back on some of their requirements, it’s the control they had to make their own decisions and not be dictated by outside events that were valuable.
While stressful for many at the time, markets recovered, however by implementing this system for our clients, our clients had the flexibility of multiple levers at their disposal to make changes if they so desired.
How would you feel, knowing that when uncertainty hits and it will, you have multiple levers at your disposal to use if and when required?
You could make a decision to continue living the way you were. You could make some changes and defer some capital expenses for later years. The control is in your hands. Your decisions and lifestyle are not at the mercy of the markets any longer. You can let the natural courses of life and investment markets continue knowing you have built safety nets around your retirement lifestyle.
So, my question to you are reading this blog and following through the steps, how well prepared are you for the certainty of the uncertainty in your life?
While some of these steps are more important the closer you are to retirement, there are steps you can put in place now to protect your future lifestyle, so you have the control when uncertainty rears its ugly head.
Hope that’s been useful.
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Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729