Friday, March 1st
Most of you have probably had the thrilling and terrifying experience of teaching someone to drive. When my oldest daughter was learning to drive, I found myself constantly reminding her: “Look ahead.” In other words, don’t just look at where you are now, but think about where you are going. Do you have a turn coming up? Do you need to anticipate changing lanes or decreasing your speed? Please decrease your speed! It’s always a good idea to decrease your speed.
When she was first learning, she also had a tendency to hug the right side of the lane, enough so that a few people honked at her. I explained that if she focused on the road farther ahead of her, the car naturally ends up in the middle of the lane. When we’re focusing too closely on what is immediately in front of us, that’s when we can get off track.
The same is true in our retirement planning as well. While we always need small, immediate, continuous saving and investing goals, in order to accomplish those, we first need to have a firm vision of where we ultimately want to end up and why. This is where looking ahead becomes so important.
I recently read some comments made by Jeff Bezos, the CEO of Amazon, that reminded me of this. He was talking about how most market analysts and commentators are focused on what’s happening currently, but that the great companies are actually “living in the future.” He said:
“We’ll announce our Amazon quarterly results, and [people will say], ‘Great quarter, congratulations!’ And then I say, ‘Thank you.’ But what I really think about is [how] that quarter was kind of baked and done 2 or 3 years ago, and right now the senior executives at Amazon are working on a quarter that’s going to happen in 2021, 2022.”
I couldn’t help but notice the parallels to good retirement planning. When we have clients who have been successful in navigating their retirement and making their money last, it’s been “baked and done” for many years. They are now simply living off the benefits of years of really good planning.
So what are the things that you need to “look forward” to as you make your own retirement plan?
SAVINGS – Of course this appears obvious, but for most people who are not prepared for retirement, it comes down to not having a vision of what they want their retirement to look like and creating a consistent savings plan to achieve it.
If we liken this part of our retirement plan to Bezos’s comment, it means that too often we are focused on our cash flow this quarter rather than our cash flow in five, ten, or twenty years, when we will enter retirement. There are plenty of calculators out there to help people figure out just how much their going to need to save, but the truth is, more of us need more discipline rather than more information.
I once heard an interview with successful entrepreneur, David Sivers, who said, “If all we needed was more information, then everyone would be a billionaire with perfect abs.” The problem is, as much as we know about the things “we should do” to achieve the results we want, there is a big gap between knowing and doing.
Commit to looking ahead at your desired destination as you set your savings goals, rather than letting your current needs and wants drive you into living with a restricted retirement income that isn’t anything like you wanted or hoped for.
TAXES – Sometimes preparing for retirement can seem overwhelming. People aren’t sure where to put their money or how to build a portfolio. They end up just socking all their savings into an employer-offered 401(k) plan.
While these plans have their place and can provide a great place to put pre-tax money, it’s important to look forward and diversify your accounts according to their tax consequences. Because the tax code is always subject to change, a good retirement plan will have allow you to access money from both tax-deferred and tax-exempt accounts in order to adjust the amount of your taxable income in any given year.
This is one of those areas that need time “to bake,” to borrow Bezos’s term. You can only rollover so much money from tax-deferred accounts into tax-exempt accounts at a time and you need to do it when it is most advantageous from a tax perspective to do so. This can take a few years of careful planning and redistribution. Your financial advisor can help you look ahead and anticipate these tax diversification needs so your money is in the right vehicles when you need it.
INCOME STREAMS – Another area in retirement planning where people need to look ahead is in income streams. Often we just think about how much total money we need to save. But it’s important to think about the actual withdrawal as well. How will you have the income you need without depleting the savings that is funding that income?
Conventional wisdom used to say that you could safely plan to withdraw 4% of your portfolio and make your money last, but many financial advisors now believe this withdrawal rate is too high. This is due to increased market volatility and the historically low interest rates we have had in recent years. This is especially true if you have to make withdrawals from your accounts during a down market at the beginning of your retirement.
The change in safe withdrawal rates necessarily means that you will either need to save more money in order to have the income you need or consider additional guaranteed income streams like an annuity. Annuities are extremely efficient at generating income and peace of mind, as they produce more income with less money while guaranteeing you will never run out of money. Again, a good financial advisor can help determine if this option makes sense for you and your retirement plan.
Looking ahead at your projected retirement income streams will make a huge difference in creating a plan that actually works through the entire distribution phase.
Creating a successful retirement plan may seem as scary and daunting as teaching a teenager to drive, but the farther you can look ahead and anticipate what you need to do to arrive at your desired destination, the better chance you have of getting there.
At Acute Wealth Advisors, this is exactly what we do: we help you look ahead and make a solid, workable plan for your personal retirement needs. Every client has a slightly different destination in mind, but we know the best routes to get you there and all the pitfalls and detours to avoid along the way. We are proud to help our clients be incredibly successful as they navigate their way to the new retirement. Schedule your personal consultation today.