Retirement planning: more than a financial exercise

The non-financial aspects of retirement planning may be critical

In our work with clients, our primary focus is the effective accumulation of wealth over the period to a nominated retirement date (or desired date for financial independence) and then the drawdown of that wealth to meet a desired retirement lifestyle. It is a challenging exercise, with the past five years highlighting how volatile markets can seriously jeopardise financial plans.

The issues of how much you need to retire and the best way to handle the “drawdown phase” have not been satisfactorily resolved. Financial certainty cannot be assured at a reasonable cost so various “probabilistic” approaches are adopted. We have developed a methodology that we believe is reasonably robust but doesn’t guarantee desired outcomes.

Sometimes, however, in our quest for increased financial certainty for our clients’ retirement we wonder whether too much emphasis is placed on financial security. While it is important to be financially prepared, it is possibly more critical to be prepared for the non-financial aspects of retirement.

You may be a long time retired

The reality is that a 60 year old male retiree can expect to live to age 86 i.e. another 26 years. To put that into context, 26 years ago the retiree was aged 34 – a lot happened over those 26 years. He may have married, bought a house, paid off a mortgage, brought up children and pursued a career that consumed a significant amount of time and energy.

The question this consideration raises is what will sustain the retiree when many of these responsibilities no longer exist. What will provide meaning and purpose, so the next 26 years are at least as fulfilling as the previous 26 years.

Most would-be retirees can clearly explain what they want to retire “from”. They have been working for 30-35 years, perhaps doing jobs that had aspects they did not enjoy. They feel it is their time to please themselves.

However, it is often less clear what they want to retire “to”. Vague ideas of travel, playing golf, reading, looking after grandchildren readily come to mind. But the reality is that a life of full time leisure undermines the whole concept of leisure.

Peter Black, a retirement coach, points out that work provides us with a number of benefits:

• Financial rewards;
• Time management;
• Sense of purpose;
• Status; and
• Socialisation.

He suggests that the intending retiree should consider how they are going to replace each of these aspects of work i.e. it’s not just a matter of accumulating sufficient investment wealth.

Black also notes that until retirement, for most people both work and home life are quite structured. In retirement, however, what you do is up to you. For some, this is a blessing. For others, it is a curse. It may result in confusion, loss of identity, status and purpose.

So the non-financial aspects of retirement clearly warrant as least as serious consideration as the financial aspects to give you the best chance for your retirement being the best years of your life. Ironically, a potential solution identified by Black to mitigate both the negative financial and non-financial issues associated with retirement is “working longer”.

But he is not talking about continuing to do the type of work you wish to retire from. He considers “retirement” the opportunity to reinvent yourself, to try something different that is of interest to you and to do it on your terms. It may be part time but, ideally, should allow time for you to pursue many of the “leisure” activities normally associated with retirement.

The “work” does not need to be remunerated, but it should provide the other benefits associated with regular work. However, if it is reasonably remunerated, it also serves the purpose of reducing financial uncertainty.

To illustrate this, consider the situation of a 60 year old retired couple, the Whites, who wish to spend $150,000 p.a. (growing with inflation), drawing down on a $3 million investment portfolio allocated 40% defensive assets / 60% growth assets. Using a technique called Monte Carlo analysis and some reasonable investment return assumptions [1], the charts below show the range of potential wealth outcomes and probability of maintaining a positive investment portfolio for two scenarios:

1. 1. The Whites do not earn any income from work after age 60; and

1. 1. The Whites earn $75,000 p.a. after-tax from work from age 60 to age 70 i.e. they only need to draw $75,000 p.a. from the investment portfolio to meet expenditure needs for the first ten years of retirement.

Scenario 1 – No work income

Potential Portfolio Wealth Variation                                                                  Probability of Positive Portfolio Wealth

Scenario 2 – 10 years of work income

Potential Portfolio Wealth Variation                                                                  Probability of Positive Portfolio Wealth

The charts reveal a significantly more robust financial outcome for Scenario 2 compared with Scenario 1. The probability of exhausting all financial wealth by age 90 reduces from about 21% for Scenario 1 to 5% for Scenario 2, with the added potential benefit of a more purposeful retirement.

Start your “retirement planning” early

Preparing for a satisfying retirement is more than a financial exercise. What is often called the “Third Age” can easily last more than 30 years and brings with it significant changes. As a society, we have no precedent for the longer, healthier lives “baby boomers” can expect.

In our view, it is therefore worth giving serious consideration to what you want your retirement to be. Ideally, you should be planning what it is you want to go “to” well before you voluntarily or involuntarily retire “from” what you are now doing.

[1] Defensive assets assumed to earn 1.5% p.a. after inflation, with an annual volatility of 3%. Growth assets assumed to earn 8.0% p.a. after-inflation, with an annual volatility of 15%.