Pilots designate alternate airports in case their destination is socked in. Generals keep troops in reserve for a break in the line. Tennis players attack the net if the power game doesn’t work.
Every Plan A needs a Plan B. So, what is your Plan B for retirement?
Many people, of course, hope for a retirement only a lottery winner could achieve, full of toys and travel. But if financial setbacks or ill health undermine those plans, you’d best have an affordable fallback that can still provide an interesting life.
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“Most retirees are not aware of all the factors they need to consider and what could derail their retirement plans, such as longevity, market corrections, taxes, inflation, no emergency fund, and early loss of spouse and related income,” says Paul Ferrigno of Ferrigno Financial in Washingtonville, New York.
“Planning for the bare minimum in health care expenses, or not accounting for the potential need to financially help loved ones is a major mistake,” says Jim Jacobucci, financial advisor at Advance Capital Management in Lisle, Illinois.
A common mistake is planning for too short a retirement, says Bill Hammer Jr., an advisor in Hammer Wealth Group in Locust Valley, New York, noting there’s a good chance that one of two spouses will live for 30 years in retirement. The couple planning for only 15 years is likely to run out of money too soon. Many people also assume they’ll spend less as they get older, but rising medical expenses often overwhelm other cost reductions, he says.
So it pays to think ahead of time about what you’d do if Plan A looks shaky.
An obvious response is to work in “retirement,” either by staying at the old job longer or by finding something new, perhaps related to a hobby or long-term interest, experts say.
“Things have changed in that the retirement mentality where one just stops going to work and does nothing is outdated,” says Jason J. Hamilton, president of KIS Financial Planning in Orange, California. “I feel that creating a life you don’t want to retire from is a more healthy approach. Instead of quitting work altogether, let’s design something where my clients can do whatever work fulfills them but they can do it on their schedule.”
Still, many experts caution against counting on work as a fallback. Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pennsylvania, says surveys have shown that half of Americans retire younger than they’d intended.
“Many Americans, in fact, are forced to retire before they are ready for either their own health reasons or the health reasons of a loved one,” Johnson says. “Some are forced into retirement because of downsizing of firms, or because firms merge or fail.”
Whether you are in retirement or approaching it, if Plan A looks uncertain, the first step is to examine expenses. By tallying all spending, large and small, for a month or two, you may find lots of opportunities to trim without too much pain. Many people fritter away money on incidentals like lunches and pay-per-view programs that cost more than they are really worth. And an annual assessment of continuing expenses like insurance premiums and wireless and cable contracts may produce savings with no sacrifice.
Plan B may indeed involve some dramatic changes, like moving to a less expensive home in a state that’s cheaper. If downsizing is in the cards, it can make sense to do it sooner rather than later, so some of the savings can be socked away.
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It also makes sense to reexamine investment strategy. A retiree should not swing for the fences in hopes of stupendous returns to make up a shortfall, as there’s not enough time to ride out a big loss from taking on too much risk. Nonetheless, many retirees are too conservative, counting on bond income, says Phil Corcoran, managing director at Savant Capital Management in McLean, Virginia.
“The most common misconception that retirees have is that their portfolio needs to be invested in a way to live off the interest and never invade the principal,” Corcoran says.
“It comes from the previous generation, maybe their parents, who retired during a multi-decade bull market in bonds with high yields,” he says. “Retirees should realize that longer life spans will require that their portfolios last longer. To accomplish that, a well-diversified portfolio with a healthy allocation to stocks is your best bet.”
Target-date funds designed to last through retirement allocate as much as 50 percent of assets to stocks even after the target retirement date is reached, to keep ahead of inflation, which can double the cost of living during a 30-year retirement.
When it comes to lifestyle, experts say retirees can often find just as much satisfaction with cheaper alternatives to some of the activities they’d anticipated in Plan A. It’s easier and cheaper to travel in the U.S. than to tour the Mediterranean, and attractions like national parks are pleasant in spring and fall when they’re not swamped with visitors.
For Plan B, new activities may substitute for some of the spending anticipated in Plan A — hiking instead of golf, or taking up gourmet cooking instead of frequenting fancy restaurants.
Advisors say happiness in retirement often comes from connections to other people rather than acquiring things.
“The main thing that I feel people need to do in retirement is to keep fulfilling a purpose,” says advisor Nick Vail of Integrity Wealth Advisors in Indianapolis. “If you aren’t finding yourself doing something you are passionate about, retirement can be very lonely and unhappy. Stay involved in organizations and causes that you are passionate about and you will feel more fulfilled and will enjoy your free time that much more.”
“Sitting around on the couch and watching TV is not healthy at any age,” Ferrigno adds. “Before one retires, we want them to consider what they like to do and what will make them happy. Sometimes it’s a part-time second career, a hobby, or volunteer work they would like to pursue. My advice is go for it.”
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“People underestimate how valuable it is to keep something in your life to focus on, something to bring meaning to your retirement,” Hammer says. “If not, you end up just running out the clock.”
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What’s Your Plan B for Retirement? originally appeared on usnews.com
