3 P’s of Pretirement
Project, Protect, and Perfect
Pre-tirement: The 5 year period before one’s ideal retirement date.
Pre-tirement is the phase during which we begin to adapt our views about money and investing in preparation for the transition to living on our assets rather than contributing to them. Growing our retirement accounts (the Accumulation Phase) and spending them down safely (the Distribution Phase) are separate chapters of our lives with unique objectives and unique risks. These phases are quite different and as such they require different approaches. It is critical that you mentally recognize the transition from the Accumulation Phase to the Distribution Phase requires understanding a different mindset.
Pre-tirement is when we begin the process of realistically reviewing what we can achieve with what we have accumulated so far. It is like the pilots checklist on final approach. Time to assess what our landing is going to look like while we still have time to make corrections before impact. Waiting too long to initiate this process can lead both pilots and retirees to crash and burn.
Famed baseball player Yogi Berra was driving to the Baseball Hall of Fame in Cooperstown, New York with some other Yankees. After passing the same landmark three times a fellow player named Joe Garagiola said “Yogi, you’re lost” and he replied: “Yeah, I know it. But we’re making great time, ain’t we?”
Saving for retirement is a journey much like a road-trip. Saving without a plan is much the same as driving without a map (or GPS). It is tough to end up where you want to be if you jump on a highway without a destination in mind - regardless of how fast you drive.
Since no one can stop aging, by default, everyone is preparing for retirement in one way or another. Even choosing not to plan at all… IS STILL A PLAN - just a highly, highly unsuccessful one!
Think of your retirement projection as the GPS to your Golden Years. Once you identify your destination you can study which route to get you there. Who has ever been on their way to an address and had their GPS point out traffic ahead? Perhaps it even showed you an alternate route to avoid it and shave some time off of your trip. Having your income projected with a Federally Focused Financial Advisor is similar, working with you to determine where you want to be and when you want to arrive, a good advisor then helps show you the best route to get there on time.
But if you don't have a destination or planned route, there is no way to gauge whether you are on the right path or need to make course corrections. Everything covered in the next two “P’s” stems from the diagnosis established in an accurate Pre-tirement projection.
Each phase of life has its own unique set of risks that are introduced. College, career, marriage, parenting. Retirement is no different. We now worry about outliving the money we accumulated (longevity risk) or the expenses of nursing home care (LTC risk) or maintaining our monthly income through market downturns (Sequence of Returns Risk). In Pre-tirement, we need to review and address these new risks in a new light.
The first step to protecting your retirement is assessing your risk tolerance and the amount of risk currently in your investment portfolio. Are your tolerance and portfolio risk aligned? Are they appropriate for this phase of your life? Are you comfortable with the odds that you will make more money than you lose in the market or is the thought of another 2008 going to keep you up at night?
If you believe yourself to be in the latter group, consider a “Safety First” approach, also known as a “Rising Equity Glidepath”, or investments with contractual guarantees protecting against losses.
The second step is making sure that those funds earmarked for retirement are preserved for their intended use. This is accomplished through a review of your insurance coverages. The majority of bankruptcies in the US are still caused by medical emergencies, even for those that have adequate health insurance. There are many problems that come about if you have to dip into your TSP to cover your bills while recovering from a heart attack or cancer - taxes and penalties on a withdrawal or worse the double taxation on TSP loans.
Due to the incredible improvements in medicine, we are surviving more medical emergencies (that were previously fatal) than ever, so flexible protection is more important than ever! Understand, the harsh reality is this: just because you survive does not mean that your retirement dreams will. Ensure that they can. Insure them.
What’s one of the most flexible approaches to implementing umbrella coverage protecting you from an array of different concerns? Many argue the case for Life Insurance with living benefits and/or long term care riders because of the flexibility. It is ideal because of its ability to protect your family if you die to young, protect you if you live long enough to require nursing home care, or protect your retirement assets if you have certain costly medical emergencies in between.
Unfortunately, retirement plans are not rotisserie chickens. You cannot simply (say it with me) “set it and forget it”. Life (and my job) would be much simpler if you could.
So the third component of Pre-tirement preparedness is the understanding that even the best plans will need to be tweaked and adjusted periodically. Things will come up in life, in the markets, in your health that will change the parameters of your plan or your goals. Perhaps a raise at work means you can retire sooner or caring for an ailing parent means retiring later. Regardless of the cause, whenever the plan is impacted it is important to discuss what the implications are for you and your family. Finding a Federally Focused Financial Advisor that you trust and have confidence in is absolutely critical because you are going to be perfecting this plan with that individual on a routine basis, with extra discussions each time life throws you a curveball, for a long time.
That’s because the process of perfecting your personal retirement plan doesn't end at retirement. There are no scholarships when you graduate from the work force, you have to make the money you accumulated during your career last the entirety of your life now. No free rides, no autopilot, thus perfecting your plan will always require active participation and periodic review.
Just like taking care of your body, the more proactive you are in maintaining the health of your wealth the longer it will last!