The Three Things You Need to Know Before You Retire

IMG_1571 copyMany years ago, I asked a mentor what was the single most important advice that he could impart to me as a young financial advisor. Without hesitation, he answered, “buy a bigger trash can”. At first, I was confused, but he explained that almost everything that came across my desk in terms of strategies or tactics was trash and of almost no importance to the long term well-being of my clients.

This information overload has become much worse of course over the ensuing years. We are all bombarded with useless data every day. Life is short and retirement can potentially be very long. What do you really need to know before your retire?

1. Tradeoffs with a Capital “T”

You need to get comfortable with tradeoffs. If you want more of something later, this usually means you have to accept less of that “something” now. Baby boomers in particular (and I am one), don’t even like the concept of tradeoffs, much less the reality. We were told “you can have it all” . This often translates into individuals delaying any type of real financial preparation for retirement until…well, the eve of retirement.

Tradeoffs are a core part of basic economics. Regardless of how much money you have, your financial resources are “relatively scarce”. You can always dream up ways to soak up all that money and more. Trust me on this…I have a lot of experience advising clients in the “run-up” phase towards retirement. The sooner you accept that tradeoffs will have to be a part of your financial future, the sooner real progress can be made towards your future.

A good exercise that you can do at home is to visualize your ideal future in 5,10 or even 20 years. What does this look like? What in your life is different in the future from the present? What changes will you need to make now to get there?

2. The Most Important Control

Most of us like to think that we can “control” almost every aspect of our life. You can’t. You can’t engineer long-term financial outcomes. Life doesn’t move in a straight line. There will almost certainly be times where you take two steps forward and one step back before regaining progress towards your goals.

The diligent application of patience as you make choices about your financial life is woefully underrated and absolutely needed for a successful future. When markets are doing what markets do and all your friends panic, exercise patience. That way, you create a financial future based on your decisions, your choices.

3. Everything Costs More, Every Year

We sometimes walk through a simple, yet powerful exercise with clients to help them understand the role of increasing prices (inflation) within the realm of retirement. Someone born in 1965, (a 50 year old) has experienced inflation at the rate of 4.1% per year during their lifetime. Very often, individuals nearing retirement assume that inflation can be easily managed because of “downsizing,” but our experience tells us this is not likely. In fact, what usually happens (assuming good health), is more time available equals more spending, not less.

The long term expectation of living cost increases directly impacts how individuals approach investing. In generations past, retirees could rely more heavily on bonds but today, with retirement timeframes stretching to three decades, that is nearly impossible. While exact portfolio allocations may vary, it is likely that most investors will need returns from stocks to offset inflation for the balance of their lives.

If you can become comfortable with these three things in your 50’s, your 60’s and beyond should be much more enjoyable. The run-up phase before retirement is about …more than numbers. Ready for a real conversation?

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