Navigating Retirement

Ahhh—the good ole’ days. We’ve heard that expression applied to many things. It used to apply to retirement. Work 35 to 40 years for the same company, get a gold watch at retirement, then collect a pension check from the company for the rest of your life. But things changed. Pension plans (defined benefit plans) were phased out in favor of 401k plans (defined contribution plans). This change essentially shifted risk for providing retirement benefits from the employer to the employee. In addition, employees began changing jobs/careers more frequently; the long-term employee with a single company became the exception rather than the rule. Retirement resources historically were a “three-legged stool”—the benefits came from 1) a pension from the employer, 2) personal savings, and 3) Social Security.

 

Today’s retirement picture is significantly different. Let’s look at today’s retirement factors but do it in a framework of “control.” There are some factors over which we have complete control, some factors over which we have partial control, and some factors over which we have no control. For example:

Complete Control

1. Saving- today’s worker has complete control over the amount he/she chooses to save and when that saving starts (the sooner the better!!).
2. Spending-spending choices directly affect the amount saved; again, a choice made by the individual. Less spending means invested funds last longer.
3. Asset allocation-with 401k plans, the plan participant chooses how the money is invested. A greater the allocation to stock means a greater possible gain (or loss).
4. Location-cost of living in retirement varies significantly by geographic location. Relocation may mean a reduced need for daily living expenses. Of course, there are social considerations (friends, family, etc.) that affect this choice.

Partial Control

1. Employment earnings during working years-choice of jobs, education, work location can affect career earnings significantly. Aptitudes and personal preferences play a role here.
2. Duration of working career-how long one chooses to work significantly affects life style standards in retirement. Working longer means greater contribution to savings and fewer years those savings must cover in retirement.
3. Life span-while everyone has a genetic makeup that affects life span, so does life style choices. Proper diet, exercise, etc. can affect both longevity and quality of life in retirement.

No Control

1. Investment returns-asset allocation is an individual choice relating desired goals with acceptable risk. However, the actual performance of investments in each of those asset categories (stocks, bonds, etc.) is something over which we have no control.
2. Governmental polices/regulations-tax policies (and rates) and government regulations have an impact in retirement. Individuals with significant holdings in qualified plans (IRAs, 401ks) have a significant partner in those plans—the Infernal Revenue Service (note: not a typo)!

We at Paragon Financial Advisors assist our clients in navigating the path to and through retirement. Possibilities and pitfalls abound; please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.