A man and woman sit at a desk, smiling while writing on a clipboard

How to Manage Retirement Uncertainty in Financial Planning

Financial Planning Planning for Retirement

Particularly if you’re nearing retirement or already retired, a major financial risk is the uncertainty about your future lifestyle consumption.

You might have a good grasp of your current lifestyle consumption, but do you have an equally good sense of what your spending might be 10 or 20 years from now? Remember to factor in inflation as well as spending on your kids, grandkids, travel, and perhaps the biggest category of all, healthcare.

Of course, spending is just part of the equation; the other component is your lifespan. You don’t know how long you’ll live, but it’s a good idea to assume you could live longer than you might think.

3 Key Components to Managing Your Retirement Finances

1. Properly Calculating Your Expenses

During your working life, you save and invest because you want to use this accumulated wealth in the future. When you consider what goes into lifestyle consumption, think about it very broadly. If you make charitable or political contributions regularly, be sure to include those. If you make annual gifts to your family, count those as well.

As mentioned earlier, be sure to include inflation in your calculations. Most thing you spend money on tend to cost more over time. You need growth in your financial resources over time or your lifestyle will suffer.

2. Making Smart Investments

Understanding what goes into your lifestyle consumption helps you determine the proper risk/reward balance for your investment portfolio. That is, what range of long-term investment returns do you need in order to fund your future spending and what type of investment risk does this require?

Your investments should be focused on your future financial needs. The portfolio choices that you make today need to be aimed at the level of consumption you want your wealth to support in the future.

Your financial decisions won’t always be perfect, but you should keep your future lifestyle consumption plainly in focus. Markets will fluctuate and your financial priorities may change as well. The financial planning process should help you cultivate resilience so that you can maintain your lifestyle in retirement.

Sometimes investors nearing retirement or already retired become averse to risk. It’s important, however, to understand the level of investment risk your situation may actually require. Because of ever increasing lifestyle costs (inflation), you likely will need to accept more risk than you might want in order to reasonably produce above inflation returns over time.

3. Watching Your Consumption Rate

Ultimately, you don’t want to be in a position where you run out of money before you run out of life.

Because of uncertainty with your future lifestyle expenses and the duration, you should pay close attention to the composition of your investments. We have seen many retired clients that are “real estate poor” owing to the imbalance between their illiquid real property assets and more liquid financial assets.

Your aim should be to have sufficient marketable investment assets that can be relied upon as your primary resource. This will help you avoid having to liquidate less illiquid assets at inopportune times.

Keeping your long-term priorities in the forefront as you make financial decisions is key. Uncertainty about exactly how the future will unfold is mostly unavoidable. Financial planning helps you develop a framework for dealing with, not ignoring, uncertainty. Start there. Ready for a real conversation?

Disclosure

Apollon Wealth Management, LLC dba J.E. Wilson (Apollon) is an investment advisor registered with the SEC. This document is intended for the exclusive use of clients or prospective clients of Apollon. Any dissemination or distribution is strictly prohibited. Information provided in this document is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product or service. Advice may only be provided after entering into an engagement agreement and providing Apollon with all requested background and account information. Please visit our website https://apollonwealthmanagement.com for other important disclosures.