The Decisive Decade
The 10 Year Period That Will Shape Your Retirement Lifestyle
There is a critical period in retirement planning, a span of roughly 10 years that largely determines the sustainability of your lifestyle throughout the length of your retirement. This 10 year time frame has no set start age, like Medicare or Social Security. It is unique to each individual’s true retirement date – the point when you finally stop trading your time for a paycheck and begin relying on your assets to ensure your lifestyle. But the most critical 10 year period of your retirement begins well before you stop showing up to work. You may be in the most decisive decade of your retirement right now without ever having been told since there is no formal announcement.
The most crucial decade, in truth, is really two separate 5 year periods sandwiching your true retirement date.
Pre-tirement 5 years
The 5 years preceding your retirement have the biggest impact on the size of your nest egg, the total balance of your assets heading into retirement. The size of your nest egg largely influences how much you will have available to spend in retirement and the sustainability of that income through the rest of your life. In the traditional career trajectory, we have the highest level of expenses when purchasing a family home and getting children off into adulthood – meaning our budget likely had more pressing concerns than saving for retirement earlier in our careers. But as the kids grow and the mortgage shrinks, the constraints on your monthly budget are diminished and you can start emphasizing your retirement efforts. This is precisely why “catch-up contributions” are made available to you starting at age 50, so that our retirement accounts can accept larger annual contributions to “catch-up” now that we have more freedom in our budget.
It is critical during this 5 year period to identify your retirement incomes and expenses in order to project whether you are assets can sufficiently fill the monthly shortfall throughout the length of your retirement. Whether you run your own pension estimations utilizing OPM calculators or request a Benefits Forecast, it is critical to ‘look before you leap’ into retirement because there are no ‘do-overs’ in either the FERS or CSRS packages. It is only with an accurate forecast that you can determine whether or not you need to extend your growing season, remember it’s not what age but what income you retire at that matters most.
The best laid plans of mice and men…
During this 5 year period, there are aspects of our retirement destiny that we control such as how much money we are saving, how much debt we are carrying, at what age we finalize our separation, and what lifestyle we anticipate affording in retirement. But there are also aspects that we cannot control, such as government policy, taxes, or market performance.
A market correction is never ideal but if you are still working, you can at least extend your growing season to get your ideal retirement back on track. Think about it, if your plan early in your career was to retire in 2009 you still had a chance to adapt after the great recession of 2008 by adjusting your retirement date. That is not possible for those who retired in 2007 and then lost a large portion of their nest egg. So it is during this 10 year period that it is important to ensure a return OF your investment as much (if not more so) than a return ON your investment as you prepare to enter the “Decumulation Phase” of your life for the very first time.
Post-tirement 5 years
Protecting principal is even more essential during the 5 years starting right when you begin relying on your assets to fill your income gap each month. It is this 5 year period that will have the biggest impact on how long your nest egg lasts.
In this early retirement phase, we must balance our need for residual income each month with our long term need for investment growth (so that our earnings can offset the erosive effects of inflation as we get further into retirement). This balancing act is unique to the investment objectives, risk tolerance, and time horizons of each individual investor. Whether you have a professional help with your objective based investing or take a DIY approach, the first step to understanding how to design a properly balanced portfolio is identifying the intended use for your different assets.
Being an informed investor means we also must understand new potential risks that are first introduced when you enter the “Decumulation Phase” of retirement and start withdrawing from your retirement accounts. Here is a comprehensive breakdown of new risks that federal employees need to be aware of when looking at positioning your retirement assets. Specifically, you need to make sure that your retirement blueprint is taking into account the 3 following concerns: public policy (2018 budget), federal tax rates over the course of your retirement, and most importantly the big one is called sequence of returns risk.
We know the market goes up and the market goes down and we have no control over when those swings occur. Squence of returns is
So if you are in the Decisive Decade, be sure to take the steps to educate and empower yourself. Learn about your benefits, project your pensions, calculate the cost of your current lifestyle, understand the new risks first introduced in retirement, and work to routinely balance your risk tolerance and portfolio allocation – either with professional help or as part of your DIY retirement planning routine.