The Retiree’s Dilemma

Do you ever wake up in a cold sweat at night wondering, that if you retire to soon, you may outlive your retirement savings? But on the other hand, if you leave it too late to retire, you may not live long enough to enjoy your retirement. This is commonly known as the “Retiree’s Dilemma”. If you are approaching retirement and this is top of mind, rest assured that you are not alone. The biggest quandary facing retirees today is the former question, rather than the latter. Medical science has increased longevity to such an extent, that many folk who retired 15 to 20 years ago, have now run out of savings and need to rely on the kindness of family.

There is an old story about a client who asked his financial advisor if he had enough savings to finance his retirement. Of course you do, responded the advisor, providing you die within the first six months of your retirement! We may laugh at this, but there is a very real concern among many people as to whether or not they will outlive their retirement savings. Current and future generations will need more income during retirement than previous generations, due to longer life expectancies and rising health care costs.

Here are some strategies to consider:

  • 1. Delay your retirement:
    60 or 65 at the very latest have been the traditional retirement ages. That is fine if the average life expectancy is 70, but what happens if you end up reaching 3 figures from an age perspective? Delaying retirement has many benefits. It gives one a longer time period to save and to let your investments work and grow, as well as giving one a shorter period over which retirement needs to be financed. Working for longer, for many people, will be a more palatable than having to save a crazy proportion of one’s income.
  • 2. Redefine Your Retirement:
    Retirement used to be a welcome reward for 40 or so years of drudgery and enduring the so called rat race. Looking after the garden or playing golf six days a week may seem appealing when one is subject to the constant stress of a heavy workload. However, it soon loses its appeal and boredom quickly sets in. Spending some time consulting in your specialist field, or starting a second career that is not capital intensive can be a major positive for retirement sustainability. Five or ten years of financing your living and lifestyle needs from consulting income, and letting your retirement investments continue to grow can do wonders to the retirement cash flow forecasts.
  • 3. Ignore Inflation at Your Peril:
    Traditional retirement investment advice was to de-risk one’s portfolio and avoid so called risky assets such as equities, the closer one got to retirement. However, the danger of this strategy is that relying solely on cash and bond yields will not sufficiently protect the portfolio from the ravaging effects of inflation. Inflation will severely deplete the effective buying power of the retirement investment portfolio that is overweight cash and fixed income. To effectively invest over the long term, one must expose a portion of the portfolio to growth assets such as equities.
  • 4. Manage Expectations:
    There is no such thing as a free lunch and one cannot live and be merry in retirement when the capital pot is not sufficient to finance the lifestyle. Being realistic about the level of income that the retirement portfolio can sufficiently fund over the retirement life expectancy is absolutely essential. It is true that the future is uncertain and nobody knows the exact date in which one goes to meet one’s maker, but living like there is no tomorrow is foolhardy and not a good idea.
  • 5. Obtain Quality Advice:
    Unfortunately, the financial advisory industry often does not cover itself in glory. Many stories abound of unscrupulous advisors taking clients for a ride. Find an advisor and/or firm that you can trust and be prepared to pay for quality advice. Don’t just go for the cheapest option. You will reap the rewards in years to come.

What is the common thread that runs through all these strategies? It is having a plan that is real, relevant and flexible. Taking professional advice around the set-up and maintenance of such a plan, and then monitoring the progress of the plan along the way is absolutely essential.

Don’t hesitate to contact an Activ8 advisor to set up a personal retirement plan, or to review and comment on an existing plan. This will enable you to enjoy your retirement with piece of mind and only worry about where to go for your next break.