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Re-Thinking Retirement After the Crash
The current economic crisis reminds me of a cartoon I saw years ago in Paris. A bungee jumper is worried about jumping off a bridge, so he checks his harness. ok He checks his connection with the bungee cord. ok He checks the cord himself. ok He checks the rope connection to the bridge. ok Relented, he jumped and the bridge broke!
The financial bridge under many of us has broken. It is especially volatile for retirees and those who are about to retire. They followed all the rules to diversify their investments. They checked and double checked the basics. Finally, they took the plunge and invested carefully. But now they are drowning in the river below without a life raft and have no idea how to get back to where they were so short ago. “I did everything right! This isn’t fair!” They cry.
No doubt the markets will bounce back once this crisis is over, but it will take some time. It is like a patient in need of surgery. His health deteriorated rapidly, he underwent an operation, which was successful (at least so far), his vital signs rebounded, but there was still a risk of infection and a full recovery was still a long way off. And older investors don’t get the benefit of a longer horizon. Many depend on their savings and investments for current “life support”. Their financial lifespan, representation. How long will their money last, now much less.
In times of loss, it is instructive to remember Elisabeth Kubler-Ross’s “cycle of grief.” At first, most people enter a state of paralysis, not knowing what to feel or what to do. Classically, this stage is denial, anger, bargaining, and finally depression until acceptance of the new reality. Of course, no one actually progresses through these stages consecutively. They are more cyclical, and so we feel paralyzed by acceptance and rejection, bargaining, and frequent, overlapping mood swings. However, once we accept that our situation has changed forever and it is now our job to face the new reality, we can rationally analyze our current situation.
So, once you’ve accepted, what’s the first thing you do? Counter-intuitively, you shouldn’t start by consulting financial journals and developing a new financial strategy. Such a radical change requires a new way of thinking, a reevaluation of your life to determine what is truly important to you and what is not. “All of the above” is no longer an option.
Your aim is to build a mental base of yourself by examining how and when you thrived, giving you the confidence and momentum to think about your future. Start by remembering two or three situations where you were at your best, you were using all your talents, and you were so engrossed in what you were doing that you lost track of time. where were you what were you doing who were you with Are you directing efforts or were you part of a team responding to a challenge? Or are you addressing and solving the problem singularly?
These “memory exercises” will give you important insight into what psychologists call your “motivational needs.” From these memories, you can also deconstruct what your passions are and your style of pursuing them. If you want to go deeper, you can also use an in-depth “personality profile”, such as the Birkman method.
Now you have great information to help you figure out what you want to do in retirement. How do you recreate your previous “flow” experiences? These do not necessarily have to be in a work-related context. But some of them will help if done in a way that will generate additional income. Any additional income will reduce the amount you need to withdraw from your retirement account. Studies show that working only 30% in the first five years after retirement will lead to a 40% larger portfolio at the end of that period.
The next step is to develop a new strategy for your retirement. Prioritize the things that are most important to you. Develop a “new life plan” for yourself that includes the things that will make you feel satisfied and fulfilled. Include details of your new life. where will you live what will you be doing Who are you going to do it with?
Finally it’s time to consider the financial implications of your new life. After making your plan, now you need to estimate how much it will cost. Use past records to determine your expected spending patterns (bank accounts, credit card statements, ATM withdrawals, etc.). Create a monthly budget first, then convert it to a year and add any anticipated large extraordinary expenses (vacations, property/income taxes, new car, new roof, etc.). Don’t forget health care expenses and a reserve account for unexpected contingencies. When you have your best estimate of your annual budget, divide it by 12 to convert it back to a monthly estimate.
Now look at where your income will come from for your monthly retirement lifestyle. Traditional sources are Social Security, pensions, post-retirement investments, 4% annual withdrawals from your retirement account, and any work-related income from part-time work, hobbies, etc. If, as expected, your income forecast is not met. Go back to the needs, your new life plan, and your memory exercise and decide what is really important to you and what is not. Repeat your strategy until income and expenses balance. This will set you on a good footing for the future.
If the market bounces back faster than expected, you can change your lifestyle accordingly. But it’s important to stay within your means so you don’t exhaust your resources prematurely. You don’t want your friends saying “The surgery was successful but the patient died”.
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