This retirement article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA.
Ah, retirement, it appears to be on a lot of folks minds. No wonder. There are 10,000 people A DAY turning 65 in the U.S. Repeat, A DAY. 1) That’s a ton of people finally putting out and heading to the 19th hole for some adult beverages. So what do they need to do to shift into retirement? Here are 4 Easy Steps to Retirement:
- Bring on the (Cash) Reserves
If you retired at age 65, kept taking your vitamins, and didn’t play in traffic you could be retired for a long time. For some, it could be a very long time. To retire and, well, stay retired for a long time you will need to maintain some equity (stock) exposure. The reason for this is very simple:
Ah, yes, inflation. It had been somewhat benign for many years. The key term here is somewhat. If you were sending your children to college or helping them financially as a grandparent over say, the last twenty plus years, you saw inflation. Every. Single. Year. As one of my friends described it, paying for college is like buying a new car and driving it off a cliff, every single year!
In addition, we can’t forget about health care. Like higher education, the costs for health care are just totally out of control. The question is which system will crash first, the higher education system or the health care system? The view from our front porch appears that higher education will be the ‘winner.’ Why? To me, it’s very straight forward in that higher education is a want and health care is a need.
In the past, I articulated The Difference Between Good Debt and Bad Debt. Here ‘good debt’ was debt used for higher education or to buy your home. Therefore ‘bad debt’ was any other debt. Think credit card, personal loans, and car loans here. It certainly looks like getting a mortgage to buy your home is still ‘good debt.’ Is borrowing for higher education still ‘good debt?’ I’m not so sure anymore.
Regrettably, there are currently 45 million borrowers that owe a total of $1.7 Trillion (with a T) in student loans. 2) Sadly, not all of this borrowing will pay off.
The Pandemic however has really elevated inflation again. Inflation rose to 7.5% annually, a 40-Year High, in January 2022. 3) Buying gas or food, if you can find what you are looking for, is like, yikes! How much was that again? Regrettably, that’s just the tip of the iceberg. Thinking about buying a car or a home? Even more yikes!
Maybe you should think about buying a bicycle or renting an apartment (if you can find either).
Many commentators will recommend having living expenses of 6 months in your cash reserve. Regrettably, most folks have nowhere near this amount. That’s fine. Start where you are and go from there.
For retirees and pre-retirees, however, their cash reserve needs to be increased, very significantly. Their reserve should be at least three years of living expenses. This elevated amount is due to the fact you want to be in a position to ride out a Bear Market. By having this cash reserve, you will not be forced to sell your stock positions when the market is down.
2. Go Long
As mentioned above, inflation is here; it’s not necessarily a good thing and is not going away anytime soon. One way to fight, or at least mitigate, inflation is by owning stocks. Although you certainly could, you do not necessarily need to own individual stocks. Most folks on Main Street will use Mutual Funds or Exchange Traded Funds (ETF’s) to get their stock exposure. The primary advantage of using Mutual Funds and ETF’s is the diversification these two vehicles offer over owning individual stocks.
As was mentioned above, hopefully you will have 3 years of living expenses in your cash reserve. At the end of the year, you will sell a year’s worth of living expenses to generate cash. The sale of equity and fixed income positions would be made pro rata to maintain your current asset allocation. These sales will replenish your cash reserve fund back to 3 years and allow you to ride out the Bear Market.
3.Close the Bank of Mom and Dad
This should be the easiest step. However, for some it is not. Ugh. The Bank of Mom and Dad has been open 24/7 for well over twenty years. Heck, the Bank’s customers, A/K/A your children and grandchildren, don’t even have to leave the house or go online to get their money. They just walk up to you (this is only if they are extroverts) and ask for money from the Bank of Mom and Dad. Of course, they don’t necessarily have to speak to you. They can merely text you their request for funds.
The old school Bank of Mom and Dad would start whipping out $20 bills faster than an ATM, which is so 1990’s. The new school Bank will simply Venmo them the money on the spot. What a great deal for the Bank’s customers, for the Bank, not so much.
The Bank of Mom and Dad needs to do a Stress Test. These were implemented by the Federal Reserve on the banking system as a result of the Great Recession of 2008-2009. The idea of the Stress Test was to see if the bank had enough capital to survive an economic downturn. When the Bank of Mom and Dad does their own Stress Test, they will likely conclude the Bank should have been shut down many years ago. Face it, at some point your children will need to learn Things Are More Expensive When You Pay For Them Yourself.
4. Be Flexible
This step might cause some angst. Sorry about that. You have set your plan and will retire at the end of 2021. You were looking forward to the Roaring Twenties 2.0. Then, well, things start going sideways. Unexpected large medical bills, both cars break down big time and it’s time to replace the roof on your house, all at the same time! Although you had planned and had a reasonably funded cash reserve, there’s no way you planned for all of this.
Now we’re looking at what’s not so affectionately called ‘Plan B.’ When I was on Cape Cod many years ago I saw a small skiff with the name on the back ‘Plan B.’
I was just wondering… what was his Plan A?
For your Plan B:
- Does this mean you will have to work another year or even longer?
- Does this mean you will have to work part time for an extended period of time after you ‘retire?’
- Does this mean you will have sell your large house sooner and move to a little house on the prairie?
Stuff happens, or as Forest Gump said, “It Happens.” Indeed. It inspired a new bumper sticker business, although I believe the spelling might have been different.
- Forbes.com, December 1, 2021
- Wall Street Journal, February 11, 2022