Entering a new year is always a good time for making resolutions. Getting serious about planning one’s financial future should be very high on that list of resolutions.
Today’s commentary looks at the second, and most important, phase of retirement planning -- the wealth distribution phase. It should not be a surprise that this aspect is almost always overlooked, for most people usually focus their attention on the wealth accumulation phase prior to retirement. In addition, we’ll investigate the post-retirement planning horizon that I believe is most appropriate for a couple.
An acquaintance of ours put the difference between the two retirement phases this way: “My wife and I have been cracking crab for a long time -- now it’s time to eat it.” In essence, he’s saying that one of the most important aspects of the wealth accumulation phase is to make decisions that won’t take effect until the distribution phase, i.e., eating our crab.
The basic challenge of retirement is how a couple keeps from outliving their assets after paying for their desired lifestyle. Obviously, there are no general or simple answers to this challenge. Even predicting one’s cash flow needs into the future becomes difficult when we have to make assumptions about the solvency of corporate and/or government pension plans, investment portfolio returns, ability to work productively for a longer time, etc.
As difficult as this basic planning process might be, it rapidly becomes complex as we introduce realities such as the impact of inflation over long periods of time, life expectancies, long term health care needs, etc.
The central question for the distribution phase is: What is the most appropriate time horizon for our hypothetical couple to consider in the planning process? In over 25 years of helping people plan for their retirement, I have found that most pre-retirement couples don’t think much beyond the actual “retirement” event. Even for recently retired couples, their planning horizon is seldom more than a year or two into the future. Yet, I believe that the most important time horizon for planning purposes is the life expectancy of the surviving spouse.
While I’ll be the first to admit how difficult it is to plan for a couple’s next 15 or 20 years, it should be intuitively obvious that a surviving spouse’s financial life is significantly different. It will be more complex and, depending on how well the planning is done, more difficult. One of the implicit assumptions that people make is that the surviving spouse’s financial life remains the same after the death of the other spouse. While we should know that this is an erroneous assumption, very few couples make specific changes to their financial situation in anticipation of those changed circumstances.
While everyone is, of course, free to plan or not to plan as they feel appropriate for their circumstances, I think it’s imperative for those couples who are faced with serious health issues, or where there are significant age differences between the two, to start a concerted effort to make meaningful improvements for their spouse’s future financial independence and security.
In summary, planning for one’s retirement is difficult but necessary. If one tries to do it by himself/herself, start by accepting the wealth accumulation phase for where it’s at, and then plan the distribution phase in as much detail as you can. In this context, I believe that the most productive planning horizon is that of the spouse who has the longest life expectancy. Finally, using a professional in this process has, at the very least, two benefits -- it not only gets the planning process going as early as possible, but it also keeps it on track and focused on those decisions which need to be made on a timely basis.