Is Your Retirement Plan a House of Cards?

Why generic retirement planning crumbles

Let's be honest, when the topic of retirement comes up, many of us glaze over. It feels like a distant land, shrouded in financial jargon, uncertainty, and vague promises. You’ve diligently tucked away savings, perhaps even diligently followed some generic advice you stumbled upon. But have you ever stopped to truly scrutinise whether your current path will actually lead you to the retirement you envision?

At Become Wealth, we see firsthand that for too many Kiwis, the standard retirement plan is, frankly, broken. It's often built on shaky foundations of averages and assumptions that rarely reflect the unique aspects of your life. Thinking a one-size-fits-all approach will deliver a comfortable and fulfilling retirement is like expecting off-the-rack curtains to fit perfectly over your windows without any measuring. Sure, the curtains might cover the openings, but they won't look or feel quite right, and crucial areas might be left exposed.

We understand. You’ve worked hard, built a life, and perhaps even paid off the mortgage on your little slice of paradise. You’re not a novice when it comes to finances.

But the transition into retirement is a significant life stage, and navigating it successfully demands more than just a passive accumulation of funds. It requires a plan that's as individual as your fingerprint, a plan that’s stress-tested against the realities of your aspirations and circumstances.

In Retirement, Returns Matter

Financial markets have been good to investors for nearly two decades. But today, the consensus of expert opinion is to expect returns over the next few years to be lower than we’ve been used too. Of course, such forecasts can be way off the mark. But you need to assume some future return to estimate whether your investment mix will support the future life you want within the time frame you’ve allotted.

The Illusion of "Enough": Why Generic Targets Miss the Mark

How often have you heard generic rules of thumb about retirement planning?  Perhaps the old suggestion to aim to receive 70-80 percent of your pre-retirement income. This might sound sensible on the surface. But what if your retirement dreams involve more travel, supporting family, or pursuing expensive hobbies – especially during the early phase of retirement when your health is likely to be capable of sustaining such activities? Or, what if your health changes unexpectedly?

Generic targets, while seemingly helpful, often fail to account for the nuances of your desired lifestyle and potential curveballs life throws our way.

Consider this: two individuals, both earning the same pre-retirement income, might have vastly different retirement needs. One might be a homebody with simple pleasures, while the other dreams of buying a yacht and spending years sailing through Asia. Applying the same percentage-based target to both is simply ineffective.

The Four Percent Rule: A Broken Compass?

A widely accepted withdrawal rule for retirement portfolios is four percent. This has been popularised by the FIRE movement (“Financial Independence, Retire Early”). This is a financial movement defined by frugality and extreme savings and investment. Many retirees — especially those in the FIRE movement — base their retirement withdrawal plans on healthy investment returns.

FIRE was born out of the 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez. FIRE came to embody a core premise explained at length in the book: people should evaluate every expense in terms of the number of working hours that it took to pay for it. Then, by saving up to 70% of their annual income, FIRE proponents aim to retire early and live off small withdrawals from their accumulated funds. Typically, FIRE followers withdraw 3% to 4% of their savings annually to cover living expenses in retirement.

But, there’s a problem with this approach.

An often-overlooked issue with the four percent rule, is the man who developed it – William Bengen – later revised it, and acknowledged the original model was based on historical data which may not account for future market conditions.

Meanwhile, some of the world’s leading financial research houses also suggested the four percent rule wasn’t fit for purpose, including Morningstar, Charles Schwab, and more. The criticism has generally centred around several areas:

1. It is overly rigid. There is a need for retirement spending strategies that adjust based on the retiree's asset portfolio, personal needs, and market conditions.
2. General market volatility and lower expected investment returns moving forward.
3. The need to incorporate other sources of retirement income, such as from a pension or rental property.

Additionally, retirees usually adapt their non-discretionary spending to their level of ‘guaranteed’ income in retirement. So, understanding specific spending needs to determine which expenses are essential and which are discretionary can help retirees modify their withdrawal approach.

Life Isn't Static, So Why Should Your Plan Be?

The biggest flaw in many retirement plans isn't just their generic nature, but their static existence. Life evolves. Your health can change, your family dynamics can shift, and the economic landscape is constantly in flux. A plan crafted a decade ago, no matter how well-intentioned, is likely to be out of sync with your current reality and future aspirations.

Think about the advancements in healthcare.

People are living longer, healthier lives. This is fantastic news, but it also means your retirement nest egg needs to stretch further. Inflation, while hopefully tamed, can erode the purchasing power of your savings over time. Changes in tax laws or investment market conditions can also significantly impact your financial outlook.

Ignoring these dynamic elements is like setting sail on a long voyage with an outdated map. You might have a starting point, but you’re ill-equipped to navigate the inevitable changes in the currents and winds.

Related topics:

• ‍Financial wellbeing in retirement
• Can you trust a retirement calculator?
• Can you afford to live to 100?

Taking Control: Focusing on What You Can Influence

It's easy to get caught up in anxieties about things beyond our control – the performance of global markets, the future of New Zealand Superannuation (“the pension”), or geopolitical events. While these factors can have an impact, fixating on them is often unproductive and can lead to inaction.

Instead, try and focus on what you can control. This includes:

• Defining Your Ideal Retirement: What does a truly fulfilling retirement look like for you? What activities do you envision? Where do you want to live? What does your ideal day look like? Understanding your goals is the crucial first step in building a relevant plan.
• Understanding Your Current Financial Position: A clear and comprehensive picture of your assets, any liabilities, income, and expenses is essential. This provides the baseline for projecting your future needs.
• Developing a Personalised Savings and Investment Strategy: This strategy should align with your risk tolerance, time horizon, and specific retirement goals. It’s not about chasing the latest hot stock tip, but about building a well-diversified portfolio designed to weather different market conditions and support the life you want.
• Regularly Reviewing and Adjusting Your Plan: Life happens. Your circumstances will change, and so too should your retirement plan. Regular reviews – at least annually, or whenever significant life events occur – ensure your plan remains on track.

Beyond the Numbers: Integrating Your Values and Priorities

A truly robust retirement plan goes beyond mere numbers. It reflects your values and priorities. Do you want to leave a legacy for your family? Are charitable or community endeavours important to you? These considerations should be woven into your financial strategy.

Furthermore, your plan should consider the practicalities of retirement.

• What are your plans for long-term care, should the need arise?
• Have you thought about healthcare costs?
• How will you manage your finances day-to-day?

These are crucial conversations that often get overlooked in generic retirement advice.

The Bottom Line: Your Retirement Deserves a Bespoke Plan

Your retirement is a unique and long-running journey, not a one-off trip on public transport. Don't leave its success to chance or generic advice that might not fit your specific needs.

At Become Wealth, we understand the intricacies of retirement planning and are dedicated to crafting personalised strategies that empower you to achieve your dreams. Retirement planning should be about more than just avoiding outliving your savings (although that's certainly important!). It should be about creating a future filled with purpose, security, and the freedom to enjoy the fruits of your labour. To book your complimentary initial consultation, simply get in touch.