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Are you ready for retirement?

A four step checklist to get ready for retirement. 

Every transition in life is difficult. Humans are creatures of habit and we tend to find change challenging. Going from a regular paycheck to funding life from a portfolio is a night and day experience for many investors. It also changes the strategy and approach we take as investors. I’ve covered the experience I went through helping to manage my mother’s transition to retirement in a two-part series that can be read here: Part 1 and Part 2

To ensure you are ready for this transition as an investor the following four steps should be undertaken:

  1. Create a budget
  2. Review and refine your investment strategy
  3. Plan for contingencies
  4. Consider end of life scenarios


Create a budget

Nobody likes to set a budget. Of course there aren’t many people that like to run out of money in retirement. A real catch-22. During retirement there is no scrimping until the next paycheck. And you can’t get a payday loan without an upcoming pay day. Retirement might be a time to overcome any aversion to budgeting.

There are two approaches that can be taken with setting a retirement budget. The first is the proactive approach. This involves figuring out the amount of money needed to support a desired retirement outcome and putting together a plan to achieve that outcome. I covered that approach in this article.

The proactive approach assumes that an investor has enough time to course correct and achieve a desired outcome. Many people don’t have this luxury as it takes a good deal of lead time, sacrifice and planning. More things that people don’t like to do. For investors approaching retirement there may not be time to work towards the desired outcome and instead the focus should be on the amount a portfolio can support on an annual basis.

There are two ways an investor can do this.

Safe withdrawal rate

The first is to focus on a safe withdrawal rate. The amount that can be withdrawn from a portfolio on an annual basis until death without running out of money is based on the following factors:

  1. The future returns of a portfolio
  2. The sequence of those returns
  3. The level of future inflation
  4. The time until death


All those factors are based on an unknowable future. We can come up with an educated guess for future scenarios based on history and current market conditions. However an educated guess is just a more informed act of speculation. And for many retirees it pays to be conservative as there is asymmetry to this speculation. Having some money left over at death is far preferrable to running out of money prior to death.

There are many personal factors that should be factored in. Are there children or an aged pension that can be relied on if markets don’t cooperate? Is leaving an estate to relatives or a charity important? Each retiree will have to make their own determination. We’ve written extensively on how to think about withdrawal rates.

Living off income

The other approach an investor can take is living off income generated from a portfolio. We’ve covered this approach in this article and in a recent episode of the Investing Compass podcast.

To set a budget using income requires looking at the current yield of a portfolio and accounting for the natural variability of income as dividends and interest rates fluctuate.

Any budget should incorporate the natural shift in spending that occurs during retirement. Many retirees tend to spend more money at the beginning of retirement when health allows more costly activities like travel. This spending tends to reduce as people age and then can spike towards the end as health issue mount.

One important consideration is that the mandatory super drawdowns are not designed with a retiree’s best financial interests in mind. Taking money out of super does not mean that it needs to spent. Money taken out of super can be invested or held in cash outside of super.

Review and refine your investment strategy

Every investor needs a plan. A plan connects goals with the investing strategy that will be used to achieve those goals. It will include criteria that will be used to evaluate investment opportunities and assess the performance of a portfolio. An investor approaching retirement should review the strategy to determine if any changes should be made to goals, asset allocation and security selection criteria.

Asset allocation and security selection are two areas which may need refinement. Asset allocation is likely the biggest driver of long-term returns. Traditionally, retirees have allocated a larger percentage of their portfolio to defensive assets to lower volatility. This makes sense to a point. Getting too conservative can lower the length of time a portfolio can last that is supporting regular withdrawals.

There is no right answer here. Like everything in investing, personal circumstances will play a large role in the decision-making process. If there are other sources of assets and income through the aged pension, an annuity, or an investment property a retiree may choose to retain a larger allocation to growth assets. The proportion of wants vs needs in a budget may play a role with a lower percentage of needs allowing for a larger allocation to growth assets. Owning a house outright is an example of one of the primary and most expensive human needs being removed from a day-to-day budget.

Some retirees may not need to change their asset allocation at all. Many retirees are choosing to continue to hold a high allocation to growth assets. However, a review of asset allocation should focus on the impact of volatility and other factors on the ability to meet a retirees’ spending needs and the longevity of a portfolio.

Plan for contingencies

That sage of investing wisdom Mike Tyson once said that everyone has a plan until they get punched in the face. It doesn’t hurt to consider what would happen if the markets start landing blows.

The biggest risk that most investors face is not achieving their goals. An investment plan and strategy should shift in focus to account for the unique risks that pre-retirees and retirees face. For investors approaching retirement the two common risks are not meeting the milestone of retirement and running out of money prior to death.

As retirement becomes imminent the biggest risk is being forced to start selling in a down market. In an ideal scenario everyone would retire when markets are going up. In reality many people have little choice on the timing of retirement and no choice of the market conditions when they retire.

Retiring in a down market means that investors need to sell assets when they have fallen in value. When markets recover there is a smaller portfolio to take advantage of the rising prices. This is a big problem because the length of time a portfolio will last under any withdrawal scenario will be lower. In some cases it could be significantly lower.

A plan should address this scenario and spell out the approach an investor will take if markets start to meaningfully fall as retirement approaches. One way to address this risk is to delay retirement. That may not be an option for some investors and it may be an unpalatable choice for others. Figure out if delaying retirement is an option.

Another way to address this scenario is to build up cash. A cash cushion can be used to fund living expenses while waiting for the market recovery to occur. And remember that markets will inevitably have poor years. The issue is not the market going down. That is life. It is being forced to sell during those down periods. And while many non-retirees make the poor choice of panic selling in down markets a retiree has to sell during those periods because they need money to pay for life.

The amount of cash held is up to a retiree. The more time the cash can cover living expenses the longer the investor can wait for the market to recover. Holding cash has a cost because long-term returns are lower than other investments. Each perspective retiree should determine what opportunity cost is acceptable given the level of comfort cash can provide.

Put that number in a plan and work towards building up cash prior to retirement.
This cash should be considered separate from an emergency fund. Even retirees face unexpected expenses and an emergency fund should be maintained to deal with those scenarios.

Consider end of life scenarios

There is no blueprint for the end of life. It is best to be prepared for whatever scenario life has in store. This includes establishing or reviewing a will to ensure that post-death wishes are documented. My colleague Shani wrote an article recently on what happens to super after death that walks through many of the items that retirees should consider.

For many self-directed investors there comes a time when health may prevent the active involvement in day-to-day management of a portfolio. Addressing this scenario can involve simplifying investments or finding a financial adviser to provide help.

Final thoughts

Things in life tend to work out until they don’t. A little planning can go a long way as an investor approaches retirement. The act of retiring is fraught with challenges as work is far more than a paycheck for many people. It offers a sense of identity, a social outlet and a constant challenge that keeps us engaged. Ticking off the retirement checklist will remove one source of stress from the process.

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