Find an Advisor

5 Ways to Plan for a Reliable Retirement in an Unreliable World

We live in a world filled with uncertainty, and those uncertainties and vagaries of life can have profound impacts on the degree to which we enjoy successful retirements. The markets may rise or they may fall, inflation may be tame or become a ravenous wealth killer, you may live a short time in retirement or live to age 100, your health may be great or there may be a devastating long-term care event. The bottom line is that when you enter into retirement, you do not have the benefit of looking through the rearview mirror into a certain past, but must look through the windshield into an uncertain future. So how do you navigate that uncertain future? Here are 5 concepts that will help guide you into planning for a reliable retirement in an unreliable world.

Begin with Values

Build Goals Based Upon Your Values

Look in the Mirror

Understand the Unique Risks of Retirement

Make the R.O.I. Pivot

Let's dive into each of these in more depth.

Concept #1: Begin with Values

We must start by defining what "success" is. I would suggest there are two aspects to a successful retirement, one being a practical goal and the other a personal one. The practical goal is one that every retiree has, which is that their money will not run out before they die. What is the personal goal? It is to not allow the fear of running out of money to prevent them from enjoying the only retirement they are ever going to have. There are no do-overs in retirement. Life, in the end, is not a dress rehearsal but rather a one-act play. The ideal is to get it right so that at the end of your life you can look back with joy and without regret at how you spent your retirement years. So how do we do that? It begins with both establishing the right values and by asking the right questions. Let's discuss each of these.

We need to see that money itself is not the goal, but rather a tool for the achievement of a goal. Let me offer an analogy. If you are building a house, the hammer that you hold in your hand is not the goal, but rather a tool to be used in the achievement of the goal. And what is that goal? It is the building of a home where you can grow old with the one you love, raise your children in rooms filled with laughter and joy, and perhaps one day bounce your grandkids upon your knee. The hammer has no value other than its ability to help you build that house where your life will be lived. In the same way, money is not (or at least should not be) the goal. There has never been a Brinks armored car following a hearse on the way to the cemetery so that the dearly departed could depart with all their money. Success is not (or at least should not be) defined as "whoever dies with the most toys is the winner." We use money as a tool to help us build a life, and to live that life so well that when we come to the end of it, we can die without regrets, with a full heart and an empty bucket list. What does this matter? So many people invest as if the goal was to die with the most money, assuming risks they do not need to take to achieve a goal that will not make them happy. Instead, proper use of the right financial products in the right stages of life can make a big impact when the objective is to live life with greatest amount of confidence and the least amount of worry.

We also need to ask the right questions. Ask yourself, "At the end of your life, when you are looking back at 30 or more years that you have spent in retirement, if you were to say to your family, 'I love how I spent my retirement'…what things would you need to begin doing now so that you can truthfully say that then?" The answers you give will demonstrate what it is that you value most. I'd venture that few, if any, people approaching retirement would say that their biggest passion was to die with the biggest pile of money. Money is not the goal. It is a tool. And it is a tool that we should use properly to accomplish the purpose and mission of our life and our retirement.

Concept #2: Build Goals Based Upon Your Values

Having discussed the need to define your values, the next step is to establish your goals for your future based upon those values that define them. One of the more humbling moments of my life came when I was first dating the woman who eventually became my wife. I had taken Julia home to meet my family and was thinking about things that we could do that could give her a good sense of where I grew up. Having been raised in the mountains of Western Pennsylvania, I (and virtually every other boy I knew growing up) began to hunt as soon as I was old enough. In light of the fact that she had never fired a rifle, I thought Julia might enjoy going out and target shooting with me, so we walked back in the woods behind my parents' home, with me carrying a target in one hand and the Winchester rifle of my youth in the other. I tacked the target to a tree and we walked back 50 or so yards. I told Julia (with, I'm sure, much male bravado) that I would shoot first "to make sure the sights of the gun were lined up right." I shot, and when we walked up to look at the target, found that I had hit the target about 6 inches from the bull's eye. Not too bad. Now it was Julia's turn. I gave her all kinds of instructions ("Take a deep breath and fire while you are exhaling...don't pull the trigger. Squeeeeze it!") and then she took her turn. As we walked up to look at the target, I assured her that it was no shame to miss on her first try, only to find when we got there that she could not have placed the bullet more dead center in the bull's eye than if she had pushed it in with her thumb. Like I said...kind of humbling.

Well, the moral of that story is that if we know clearly what our target is, we stand a pretty good chance of hitting it. Unfortunately for many people, they enter into retirement with no clear sense of why they are retiring and how they want to live out their retirement years. Rather than "Ready, aim, fire," their motto is "Ready, fire, aim!" With no clear sense of direction, their retirement can end up being a disappointment, both emotionally and financially. That's why it is so important to establish your goals. Then, realigning our portfolio and insurance product allocations with our age and goals will make sense. Remember this: retirement planning is nothing more than aligning your portfolio with your passions, of connecting your dollars with your dreams. We just need to know what those passions and dreams are so we can create a plan to live the retirement we've dreamed about.

Concept #3: Look in the Mirror

Sadly, many people will stumble through their retirement due, at least in part, to the fact that they overestimated how well they would be able to navigate the vagaries and volatility of the market. Research shows that the biggest factor that will determine investor outcomes is investor behavior. We sell low when the market drops, buy high when it recovers, and then repeat until broke. It can be a vicious cycle, driven in part by a faulty assumption by investors that they will manage volatility wisely.

A study was conducted a few years ago at Yale and Princeton that tells us a great deal of how we tend to view ourselves. The study gave college students questionnaires asking how they compare with their classmates in a variety of areas. For example, one question asked: "Are you a more skillful athlete than your average classmate?" The overwhelming majority of students responded that they are above-average athletes, drivers, dancers and students. In some cases, 75% or more of the students felt that they were above average in one category or another. Of course, the truth is that in any endeavor, the statistical reality is that only 49% of the population can be above average at anything. There is a risk for investors to have this same sense of overconfidence in their ability to manage money. We tend to have long memories when it comes to our investment triumphs and amnesia when it comes to our failures. This can lead us to take risks we should not take, believing that we have an above average ability to ride out market turbulence. If the truth ends up being that during a steep market downturn the losses in an overly aggressive portfolio would cause us to do what the very average investor tends to do (which is to panic and sell), then our inflated assessment of ourselves as investors can create some real financial harm.

Everyone thinks that they sing well in the shower. Everyone. That doesn't mean that everyone should go off and audition to sing for the Metropolitan Opera. Confidence is one thing. Hubris is another. We need to be honest with ourselves when it comes to our ability to handle risk and to weather market downturns. One of the great virtues of a fixed indexed annuity is it manages that risk for you: they avoid the losses when the market goes down because they will never be credited with less than zero, and they can participate in some of the gains when the market index goes up because of the annual reset feature.

To be clear, someone who has an unrealistic confidence in their ability to time the market perfectly, getting in and out of equities at just the right moment, is not going to consider an annuity as a tool unless they begin to realistically look into the mirror at the investor who they actually see rather than the one they wish they were.

There are 5 key questions we need to ask ourselves:

Do I have the knowledge to make my own investment decisions?

Am I willing to dedicate the time to learning what I need to know and to continue to educate myself as the years go by?

Do I have the discipline to "stay the course" when market waters become choppy?

Does the idea of managing my own portfolio make me feel more confident or less confident that my money will live as long as I do in retirement?

If I were to die today and my spouse had to suddenly become the manager of my portfolio, would that overwhelm him/her?

Concept #4: Understand the Unique Risks of Retirement

Picture this. You are floating down a tranquil river, enjoying an afternoon of leisurely boating. It is a spectacular day. The sun is shining, the birds are singing, the fish are biting and all is well with your world. The stresses of your everyday life melt away as the water gently laps against the side of the boat. You seem to hear a roar far in the distance, but it is not enough to distract you from your perfect day.

But then the roar begins to get louder and louder, finally to the point where it can no longer be ignored. By then it is too late. You realize as you are flying down over a massive waterfall that the river you have been on was the Niagara River and the roar you had heard in the distance was Niagara Falls.

While I'm sure you have never been on a boating trip quite like that described above, you may have been on a comparably wild ride in your financial "boat" in recent years. You may have experienced the pleasant boat ride as the dot-com bubble grew and grew in the 1990s…until the bubble burst in the year 2000 and the waterfall appeared. The waters eventually calmed down again and you enjoyed the tranquil growth on your portfolio in the middle years of the decade that followed, the economic warning signs seeming like nothing more than a distant roar…until the descent down the waterfall in 2008, a year that saw market values drop nearly in half.

As portfolio values plummet in the descent down the waterfall, so does peace of mind as a good night's sleep becomes harder and harder to come by. Instead of counting sheep as we close our eyes, we end up counting stock values, asking ourselves, "Isn't life supposed to be about more than constantly worrying over money?"

And now here we are again, and people are worried if the sound they hear in the distance might again be a waterfall. To be candid, I have no idea if the markets will ascend or will plummet tomorrow. I would argue that the so-called experts on business TV shows (the experts who are seldom right but are never in doubt) speak with such confidence about what they believe the markets will or won't do, not because they are actually that confident, but because they are afraid no one will watch their shows if they humbly acknowledged that there are simply too many variables to successfully predict what the markets will do. But what if the markets do drop significantly? How calamitous might that be for folks at or near retirement? It is so important that we understand there are unique risks that come into play specifically for retirees. One pertains to the time it takes markets to recover, and the other has to do with "sequence of return" risk.

When markets go down, the first thing that your broker may say to you regarding your investments is, "Just hold on to them. They'll come back." While that may in many cases be true, the question is: how long might that take? When the markets imploded in March of 2000 at the end of the dot-com mania, it was not until 2013 that the S&P 500 got back to where it had been in March of 2000…13 years later. Now, if you are 30 years old and decades away from retirement, that 13-year time period might not seem so bad. But if you are 65 years of age and retired, wanting to live off of your investments, then a 13-year period can be way too long.

It has been said that the First Rule of Holes is that when you find yourself in one, stop digging! Consider this "risk riddle": If you had $100,000 in a financial product that lost 50%, it would now be worth $50,000. Since you lost 50%, what percentage gain would you need to make to get back to where you were? Many people will say that since they lost 50%, they would need to make 50% to get back to their starting point - but because of "reverse compound interest," a 50% gain on $50,000 would only get you back to $75,000. After a 50% loss, you actually need a 100% gain to get back to your starting point! It can be harder to climb out of a hole than it was to get into it in the first place. That is made all the harder when you are retired and in need of income.

One of the great virtues of a fixed indexed annuity is that you never "fall into the hole" to begin with because the money placed into the annuity is protected from market loss. The degree of stability this can help bring to your financial world is tremendous.

The second aspect of risk has to do with "sequence of return" risk. Essentially, when we are younger it does not matter when the good market years and the bad market years fall, so long as we end up with our desired outcome. That math changes considerably, however, when we are retired and begin withdrawing money for income purposes.

We need to recognize that when it comes to our money, we must act our age. What I mean by that is that the level of risk we are taking on in our portfolio needs to be consistent with how much time we have in front of us to leave our money alone to recover from a major market correction before we will need to access it for retirement income. This is particularly true after we retire. Academic research is continuing to demonstrate that for those taking income in retirement primarily from equities, the performance of the portfolio in the early years of retirement will often tell the tale as to whether or not the retirement account will live as long as the retiree. If the early years are fundamentally good ones in the markets, then in spite of taking income for retirement, the account has the chance to grow and be better prepared to deal with the inevitable rough years in the market that will one day come. If, on the other hand, the early years of retirement are negative years in the market, a compounding of withdrawals for income and losses in the market can create a hole that can be very hard to climb out of. Van Harlow, director of research at the Putnam Institute, says succinctly: "One of the biggest risks to a successful retirement is the exposure of savings to one or more adverse negative investment returns in the early stages of retirement."

Let me offer you a hypothetical example. Let's look at two retirees, we will call them Jack and Jill. They have a lot in common. Both of them retire at age 65, both of them have $750,000 at retirement, both withdraw 5% per year of their account for income and index that income to inflation each year, both of them have investment returns that exactly mirror the S&P 500, and both of them live 30 years until age 95. The only difference was that one retired in 1973 and the other in 1974...and yet that one small difference changes the outcomes entirely. Jack retired in 1973, and he ran out of money in 22 years, spending the last 8 years of his life broke. Jill retired in 1974 and enjoyed income for the next 30 years and actually saw her nest egg grow to more than $1.2 million at the time of her death. Why the disparity? Jack did not know it when he retired, but 1973 was a lousy year to collect his gold watch. The market was down dramatically that year, and his retirement account found itself in a hole that Jack was never able to dig his way out of. By retiring one year later and dodging the bullet of 1973, Jill ended up with a great retirement. The problem is obvious: we do not have the benefit of retiring with a rearview mirror. We have to look through the windshield at an uncertain future. We do not know in advance if it is a lucky time to retire or an unlucky time. One of the great virtues of a fixed indexed annuity is the ability to secure a contractually guaranteed income to help prevent what happened to Jack from happening to us…running out of income before we die.

Concept #5: Make the ROI Pivot

When we are younger and working towards a far-off retirement, the letters R.O.I. inevitably stand for "return on investment." And quite frankly, when we are young and have long time frames to work with and decades until retirement, that is perfectly fine. But when we are older and at or near retirement, those same three letters need to stand for "reliability of income." As you approach retirement, it is vital to make this "ROI Pivot," so you can enter into retirement with the confidence your money will live as long as you do. Increasingly, the academic research is showing just how powerful an annuity can be in providing the reliability of income that a retiree needs.

The value of an annuity in an overall retirement plan is the ability to create some income predictability for your retirement future. Jeffrey Brown, a professor at the University of Illinois at Urbana-Champaign and a co-author of the research paper "Framing Lifetime Income" says: "Guaranteed lifetime income, such as in the form of annuities, is incredibly valuable for retirees. It is the single best way on a risk-adjusted basis to maximize one's ability to spend in retirement without concerns about running out of resources. Every other strategy either exposes the individual to more risk, or reduces one's ability to consume."

Conclusion: Getting Retirement "Right"

We probably would never set out on a journey without first having a pretty good idea of where we wanted to go. It is not much different when it comes to planning for retirement. On a very personal level we need to think through what it is that we really want to do and accomplish in retirement. Lee Eisenberg, in his bestselling book The Number, wonders aloud about why people do not plan for retirement. He asks, "Could it be that in the end the reason we don't plan is because we don't have anything meaningful to plan for?" What is it you want to do when you step away from their work? Do you want to travel more, spend more time with children and grandchildren, be more engaged in church or with charities? Perhaps you made your living as an engineer but what you always really loved was art history…do you go back to school to pursue that love? The late Steven Covey, in his book The Seven Habits of Highly Effective People, talked about the need for us to "begin with the end in mind." Rather than stumbling through your retirement years, ask yourself, "At the end of my life, when I look back at my retirement years, what do I want to be able to say about how I spent them?" Without a defined goal of what you want to do in retirement, the years can just slip away as you spend time engaging in things that do not engage your heart. To quote the poet Goethe, "Things which matter most must never be at the mercy of things which matter least."

So, as you prepare for retirement, in a time of volatility and uncertainty, remember these 5 concepts to help you plan for a reliable retirement in an unreliable world:

Begin with Values

Build Goals Based Upon Your Values

Look in the Mirror

Understand the Unique Risks of Retirement

Make the R.O.I. Pivot

If you want to know whether you are on track to enjoy the retirement you have in mind, complete WeTirement's short retirement survey and let us connect you with an independent financial professional in your area who may be able to help you create an income strategy to achieve your retirement goals.

©2022 Tarkenton Financial LLC. Fixed indexed annuities are products of the insurance industry. Annuities are not FDIC insured. Guarantees in insurance products are based solely on the financial strength and claims-paying ability of the issuing company. This article is not intended to provide specific guidance or recommendations for your individual financial situation. Speak to a qualified financial professional for guidance on your individual situation.