How a Financial Plan Can Help You Spend More in Retirement

After my second year at University of Michigan I decided to spend the summer working at a backpacking camp in Colorado.  This seemed odd being that I had never been to Colorado or had been backpacking. Bringing kids on 5 days camping trips around Colorado, how hard could it be?  I loaded up on the cheapest (and unfortunately heaviest) equipment that I could find, and made the 2-day trip to Durango. The first few trips went fine, as I got a first hand view of Colorado’s 14,000 foot peaks.  I also had the help of going on these trips with experienced mountain guides. After my fourth trip it was decided that I was doing well enough that I was able to lead a trip on my own. A fairly easy trip in which it would be “virtually impossible” to get lost.  A huge relief given my very mediocre map and compass skills.

For three days before the trip I studied the map all day and night.  It seemed easy enough. Climb 2,000 feet, walk around a small mountain (there are hundreds), and end back to the small mountain town, Silverton, 3 days later.  The first day was perfect. We headed up a steep trail and after hiking for about 4 hours, found an amazing campsite with incredible views above the town we had left just a few hours back.  The trip was going as plan and I knew exactly where we stood on the map as I studied it closely in my tent. The rain started while we were packing up and leaving camp the next day. What started as a light drizzle became a steady rain by noon and shortly after the thunder and low clouds rolled in.  Still, we hiked on although the rain had turned my trustworthy map into what looked like swiss cheese. After walking around a small mountain that I concluded must have been the same one I saw on the map, we set up camp exhausted and soaking wet. It wasn’t until we woke up that the panic set in.

Somewhere in the rain storm we had walked around the wrong mountain.  It was obvious immediately when we woke up. The trail that we were on, headed straight up another mountain and in the wrong direction from town.  We were lost and the map that we had was basically in shambles, it would have been better used starting a fire. The plan that I had imagined for the past five days, was completely thrown out the window. No cell phone coverage, half a map, and a bunch of scared campers was not what I planned. The new plan was to walk down the mountain and follow a stream until we found a town in which we could call camp. After nearly 8 hours of hiking we found a road, and shortly after a car.  We were saved, and although the trip was a disaster, we lived to talk about it.

Mike Tyson, yes the boxer, has my favorite financial planning quote.  “Everybody has a ‘financial’ plan until you get punched in the mouth”.  Ok, maybe I added the financial part to the quote, but still it is fantastic.  My plan for the trip was great, until the rain set in and we walked around the wrong mountain.  No matter how sound your retirement plan may be, rain will set in from time to time. For example, imagine a couple who retired in 2007.  The couple saved and planned accordingly, just to see the stock market, and their net worth, go down by 50% over the next year and a half.   Retirement is long, and for better and worse, there’s going to be a lot of stuff that happens. Maybe a husband has to spend 5 years in a long-term care facility,  a wife that passes away at an early age, or maybe you need $15,000 for a new roof that you weren’t planning on. A retirement plan doesn’t need to plan for every possible scenario, but it should allow you to not panic when the unexpected happens.  And the unexpected will happen.

A retirement plan should also help with the two main ‘mistakes’ that I see as a financial advisor that people make in retirement.  First, is the common mistake that all of us have heard about and maybe even have seen friends that have experienced this. The person that feels like retirement is the time to enjoy the fruits of their 30-plus years of work and spend their savings like it will never run out.  They pay off a mortgage, justifying the huge withdrawal with the fact they have a lower monthly bill. They buy a new car, take trips around the world, and help out the kids. When everything’s said and done they are looking for work a few years after retirement unable to control their budget.  There is no question that every retiree and probably every worker getting close to retirement has had nightmares about this scenario.

The other problem that we see is on the other end of this spectrum.  It’s not the spend too much problem, but rather the not spend enough issue.  Yes, not spending enough in retirement is a problem! You have worked hard, you have saved, and have probably built up a sizeable retirement nest egg.  You didn’t do all of this so that you could retire just to sit on the couch and watch old Cheers reruns. Yet, many people can’t stand to see their money go down, and would prefer to do and spend nothing rather than see their life savings start to dwindle away.   

Both of these problems can be addressed very simply by creating a plan.  Retirement planning isn’t easy. Stock market crashes, major health scares, and economic recessions are certainly going to happen over your 30 or more years in retirement.  Your plan should be prepared for this, and more importantly you should feel comfortable no matter what is happening in the world. Retirement is a time for you to try new hobbies and activities that you never had time for before,  and your retirement plan should allow you to maximize your retirement income without you having to worry about going back to work. The goal of retirement shouldn’t be to maximize your kids inheritance, but rather maximize your enjoyment in retirement.  

The reason most people don’t spend enough in retirement is because they are nervous about running out of money.  Many people are fearful that completing a retirement plan will make them create a budget and ultimately they think they will be disappointed.  Yet, most of my clients who complete a retirement plan are pleasantly surprised. They have more income than they were expecting, and most of the time, they don’t have to change their lifestyle.  The goal of retirement is to have the same amount of after-tax money as when you are working. A financial plan can help you actually maximize your income in retirement, not reduce it. Your financial plan is your map in retirement.  Don’t let it get wet.

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