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Not in the Plan

Richard Quinn, 2:07 am ET

HAVE YOU EVER MADE a plan and then had it go awry? Like the car breaking down on the highway when you’re driving to Christmas dinner, as happened to me several years ago.

Stuff happens. That’s why I can’t understand why many people preparing for retirement seem to have unwavering confidence in their planned budget—one that’s often generated using software or a spreadsheet.

Hiring a financial advisor may help. But for that advice to bolster your chances of success, you must be 100% honest when discussing your goals, your fears, and how you define risk and financial security. Is your goal really to spend every penny and leave nothing to your children? Are you really an aggressive investor and truly willing to live on a tight budget?

I’ve heard people say their planning covers every contingency. Over the next 30 years? I doubt it. I’ve been retired since 2010. In the last three years, I’ve spent $5,000 on an unplanned tree removal and $8,000 on dental work in a single month. In 2021, my former employer dropped our medical and prescription drug coverage, replacing both with a payment to a health reimbursement account that, over time, won’t keep up with premium inflation.

Those are just some examples of what can happen. I’m thinking they aren’t in row 10, column B, of most retirees’ planning spreadsheet.

Some people have supreme confidence in their budget and how much money they need. Unfortunately for many, it may be necessary to live on a strict budget that only covers basic necessities. But is that a desirable plan? Having just enough to get by, based on some cooked-up budget, seems a bit risky.

Surveys consistently show a great disconnect between saving rates, expected retirement income and spending in retirement. I cringe when I read that living in retirement is possible on 40% or even 60% of preretirement income. Will that income really cover all financial risks for 30 years—and perhaps far longer if folks are retiring in their 50s?

My perspective is different from that of most retirees. I have steady income from a pension and Social Security that’s equal to 100% of my preretirement base pay. Perhaps I’m too conservative—and too skeptical of retirees who think they can get by safely on their investments and Social Security.

I try to think ahead, to cover all the bases, to account for life’s “what ifs.” So far in 2022, those “what ifs” include high inflation, a rocky stock market and rising interest rates. I maintain retirees need more than whatever their budget indicates. Their retirement finances should include an emergency fund—and ample financial breathing room.

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Peter Blanchette
Peter Blanchette
17 days ago

You should have gotten yourself a reverse mortgage loan to pay for the tree removal and dental work. Under current rules you would get about 47% of the appraised value of your home less about a 4.5% commission on the appraised value and currently earn about 3% yearly on the unused balance(previously 5 or 6% yearly return). On a home valued at $100K times 47% less 4.5% commission that is about $42-43K. And the loan is a nonRecourse loan. I’m sure you know what that means. Your heirs might get less from your house but more from your retirement portfolio. And you do not have to make any payments up to the time you leave your home.

Roboticus Aquarius
Roboticus Aquarius
19 days ago

A lot of talented people struggle with numbers and forecasts. I think this makes having a ‘margin of error’ critical when trying to plan 30 years ahead.

Having one’s pension slashed in mid-career doesn’t make it any easier, many of us have been converted to cash value pensions (if that) with values an order of magnitude lower than the plans they replaced.

Even SS is uncertain, as Congress could do anything from funding projected shortfalls to privatizing the system.

I think it’s critical for all of us contemplating retirement to have a plan B and a plan C, to provide protection against worst case scenarios.

R Quinn
R Quinn
19 days ago

Three yeas after I retired my pension was cut by 10% claiming there was a calculation error – there wasn’t.

Based on erroneous analysis my former employer cut the future accrual on a pension plan that was initiated in 1911. Some consultant said the benefit was too high when you factor in 401k and SS value apparently ignoring the fact the worker contributed to both plans and the growth in the 401k was mostly market driven.

evan rayers
evan rayers
19 days ago

I always read your knowledgeable & insightful OP’s here on HD Rich.

I currently do not know how to attach or link a jpg. that I keep & value in my notebook that would fully illustrate my reply below Rich.
Supporting this threads theme of important retirement unknowns.

It’s credited on the Wiki to Donald Rumsfeld:DOD.
Wiki states Rumsfeld said:

Reports that say that something hasn’t happened are always interesting to me(Rumsfeld), because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. 

So upon further review: known unknowns, unknown knowns, known knowns, and finally a retirees unknown unknowns should account for some sort of % of retirements preparation.

Recognizing these unknown unknowns grow vastly as time passes.
How many FIRE advocacy sites have a huge downturn.
Mr Money Mustache is one income generating site that sold off in 2019 advocacing FIRE ideologies. Alas, there are many complexities.

100Million tucked away, you’re probably fine.
I only known two former classmates like that whom both inherited that wealth.

Good luck & Best wishes….

Last edited 19 days ago by evan rayers
Jerry Pinkard
Jerry Pinkard
19 days ago
Reply to  evan rayers

I love that quote by Rumsfield. It should give all of us some humility with our planning.

John Redfield
John Redfield
20 days ago

Always enjoy your articles, but don’t always agree. I retired in 2015 at the age of 59 with a small pension that started in 2021 and planned to take SS at age 70 (still do). I have a BA and MS in physics and worked the majority of my career as a geophysicist in oil and gas exploration. I tend towards the quantitative side. My income was and still is revenue from overrides on oil and gas wells. I did not model a retirement plan, the uncertainty was too great. I like the quote by the statistician George Box, “All models are wrong, but some are useful.” I could simply calculate how much I spent per year and multiply by the number of years I expected to live for a first order estimate of my possible retirement needs. I had saved a multiple of that number with a legacy for my sons on top. In addition, I had an unknown income from royalties. I had enough.

What could go wrong? My wife divorced me after two years which cut my savings in half. I gave her another 1/8 to buy her share of the royalties. One of the big fields shut in for over a year to fix plumbing problems, therefore no income from those wells. Most of my wells are in the offshore Gulf of Mexico and hurricanes can shut down production for months during a bad season, even if they cause minimal damage onshore Last year, Ida was particularly damaging both onshore and offshore. The pandemic caused oil prices to plummet, actually briefly going negative. I predicted none of this, but knew the risks. I still have enough.

Having post-retirement income equal to your pre-retirement base pay is not a useful model for me. Company pensions are the exception, not the rule.

iam4vandy
iam4vandy
20 days ago

Life is uncertain and it’s important to plan for the unexpected. However, don’t be fooled: you can’t control everything. It’s important to realize the trade off of delaying retirement to accumulate more financial security at the expense of enjoying the next phase of life. I suspect many readers struggle with the transition from saving to spending. We’re zebras and we have a hard time changing. A study from the Employee Benefit Research Institute in 2018 indicated that about one-third of retirees had more money after 20 years of retirement than when they started. I recall reading 3 questions to ask when contemplating retirement. First question asks how winning a 10 million dollar lottery would change you (remember, you’re a zebra). Second question is what would you do today if you were given a terminal diagnosis with death in a few days (go to work?). Third question is what would you most regret not doing given your prognosis.

Rob Jennings
Rob Jennings
20 days ago

Guilty as charged for having a spreadsheet and plan that goes out 35 years. The plan however includes several lumpy expenses (cars, house maintenance), admittedly it cannot possibly anticipate all of them. For example the plan includes inflation but until this year it was at the historical average of 3.2%-who knows how long the current high inflation will persist? Additionally, the plan is pretty conservative with a floor of guaranteed income combined with some growth. Even so, I totally agree with having a strong safety margin. I was one of those who worked “one more year” after our advisor we could retire. And I decided to keep working part-time in retirement, doing some consulting which have been doing for years now. The motivation for this is not primarily financial but it sure helps pad the cushion while delaying SS.

Ginger Williams
Ginger Williams
20 days ago

My pension will be worth 120% of my pre-retirement expenses when I retire, giving me a buffer for unexpected expenses in early retirement. I’ll also have a substantial cash emergency fund.

I plan to wait until 70 to file for social security, since the pension doesn’t have a COLA. I plan to wait as long as I can to draw on my 403b account, because those investments will be needed as inflation reduces the value of my pension.

I was planning to retire in three years, at 62. If inflation continues to be above 5%, I’ll delay a few years.

AKROGER SHOPPER
AKROGER SHOPPER
21 days ago

Richard you are spot on!! We just received word out flip fone will stop working due to shut down of 1Ghz cell towers causing telecommunications increase. Our city has increased our taxes and reduced services!! Grocery shopping has become hazardous to the budget, but we all must struggle to the next day. Who could have anticipated these un expected increases on any spread sheet!!

Jerry Pinkard
Jerry Pinkard
21 days ago

I spent 30 years as leader of large IT groups where change was the order of the day. I learned to have a decent buffer for unanticipated issues. The reality was I knew we would have unanticipated expenses. I just did not when and where they would occur. This was for a one-year budget. Planning and budgeting for 30+ years is at least an order of magnitude more challenging.

Prior to retirement, I did a financial plan with Fidelity. It required me to develop a rather detailed retirement budget. It was time consuming, but I appreciated the need to do it. It occurred to me that if my budget was off by 10% or 20%, how would that affect the probability of success for my plan? For many, that may mean the difference between success and failure, and it would be easy to do without an adequate buffer.

Like Richard, we have experienced major unplanned expenses in retirement. They like to come in bunches. Fortunately, my pension and our social security still more than cover our annual expenses, even though I have a non cola pension, Our plan is to use our savings if and when our pension and social security no longer cover our annual expenses. I do not foresee that happening anytime soon, but with the crazy inflation we have right now, it may be sooner than I think.

Andrew Forsythe
Andrew Forsythe
21 days ago

I like to sleep well at night, and for me that means making provision for a possibly large margin of error in my planning. As you point out, it’s the unknowns that can wreck any plan.

R Quinn
R Quinn
20 days ago

Yup, I agree. Sleeping and minimizing stress are very important.

mytimetotravel
mytimetotravel
21 days ago

Does that pension have a COLA? Because if not, you can’t count on pension plus SS covering your expenses going forward. Mine doesn’t, so I will have to rely on investment income as well at some point. Also, what counts is not what percentage of your pre-retirement income you can cover, but what percentage of your pre-retirement expenses. I did not spend close to 100% of my final year salary, and after retirement I paid off my mortgage, stopped saving for retirement and saw my tax bill drop. Trying to replace my final year salary would have been overkill.

R Quinn
R Quinn
20 days ago
Reply to  mytimetotravel

No COLA, same amount for last 12 years. I still run a surplus though.

If and when necessary, my backup plan is to supplement income with some dividends and muni bond interest.

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