Preparing Psychologically for Retirement

Dr. Daniel Crosby, Ph.D., President, IncBlot Behavioral Finance

What’s your perception of retirement? Will it be a bittersweet parting of ways with your professional career… or a fantastic reward for decades of hard work? As you weigh the decision to retire, you’re probably examining the trade-offs between retiring early to pursue leisure and working longer to accrue a larger nest egg. Financial stability and health are the two of the largest factors influencing preparation for retirement. Psychological preparation should shape that decision too.
Research by the National Bureau of Economic Research captured the effect of retirement on both physical and mental health. Over the first six years of retirement, you’re likely to experience a 5-16% increase in difficulties with daily activities, a 5-6% increase in illness and a 6-9% decrease in mental health. It’s possible to mitigate, or even avoid, these effects. But, you’ll need a solid game plan to do it.

Prepare for…how you’ll make the decision

Many people spend years shaping a meticulous retirement savings plan. Yet, the decision to retire isn’t always a rational one. In a recent bulletin, the Social Security Administration (SSA) described why the agency educates adults about the benefits of later retirement. It’s not just about savings. The SSA is working to offset hyperbolic discounting; a factor in which the decision to take a larger, later reward is pitted against a smaller, sooner reward. When the reward is perceived to be far in the future, people tend to wait longer for the larger reward (in this case, larger Social Security benefit withdrawals). However, as the reward opportunity nears (reaching one’s retirement age), people shift their preferences toward smaller, earlier rewards.
As you prepare for retirement, you will most certainly face this trade-off. Will you stay the course, and follow your long-term retirement plan, or will you take the first available opportunity to retire, even with smaller benefits and income? Impulsivity strikes often, particularly for those with less-than-satisfying careers. Be aware of how you’ll react once the retirement reward appears on the near horizon so that you make a rational decision.

Prepare for…changes in stressors

What made your blood pressure boil throughout your working years? While you’re leaving the workplace behind, retirement is not a stress-free experience. Work stress is frequently replaced by other stressors in your retirement life. Financial stress stems from the adequacy of your retirement savings, and it may spike with changes in market performance. The same happens if poor business continuity threatens the pension benefits you were promised. Health-related factors cause stress too. Whether you’re battling an acute illness, chronic illness, or end-of-life decisions, health issues take an emotional and financial toll.

Prepare for…changes in relationships

Throughout your working years, you’ve probably spent more time each day with office colleagues than with your spouse or family. Retirement shifts the balance back in favor of your loved ones, but that transition isn’t always easy. When faced with an additional 8 to 10 hours of interaction each day, retired spouses find they must work on their relationships—easy interaction isn’t a given.
Relationships are an important driver of mental health throughout your retirement years. Your ability to build friendships and to remain engaged with the world around you can help offset the depression that tends to affect retirees. Meaningful and engaging relationships offer personal fulfillment…and thereby stronger mental health.
Preparing psychologically for retirement requires an in-depth examination of your expectations about the retirement experience. It’s not all stress-free vacations and easy living. Take time to understand your own motivations to retire and how you’ll continue to grow outside of your work-related persona.

Sources:

“Behavioral & Psychological Aspects of the Retirement Decision”,   Knoll, Melissa.  Social Security Bulletin Vol. 71 No. 4, 2011

“The Effects of Retirement on Physical & Mental Health Outcomes.”  Dhaval, Dave. NBER Working Paper 12123.

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This material is intended to potentially assist you in planning for your future. Guardian and its affiliates, subsidiaries, employees, agents, and outside contractors, including but not limited to Dr. Daniel Crosby, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Please note that individual situations can vary, and you should consult your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.

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Sequence of Returns and Income in Retirement

When it comes to planning for retirement, your view should be long-term because it is unknown as to how long your retirement years will be. You should explore financial products that can provide income for your lifetime and that of your spouse’s lifetime. In addition, a portion of your income should be independent from and not reliant on market performance. Finishing confident is just as important as beginning confident.

Up 7%, Up 27%, and Down 13%

A June 2011 report titled Retirement Income — Ensuring Income throughout Retirement Requires Difficult Choices from the U.S. Government Accountability Office (GAO) to the Chairman, Special Committee on Aging, U.S. Senate, examined sources of retirement income and risks, such as the sequence of returns. In the report the above noted annual rate of returns were used to demonstrate the risk about sequence of returns. If you experience these returns in any order, the average annual rate would equal 7%. Meaning, it doesn't matter in which year you would experience any one of these returns, the average result would always be the same. But when it comes time to take income, the sequence of returns throughout the portfolio’s life will make your experience be quite different. If the portfolio experienced these returns as up 7%, up 27% and down 13% (repeating this order throughout your retirement), and you start to withdraw as income each year a fixed 9% of the first year’s balance of the portfolio, your assets would last for 24 years.

Up 7%, Down 13%, and Up 27%

However, if these returns were up 7%, down 13% and up 27% (repeating this order throughout your retirement) and

withdrawing the same fixed 9% each year, your assets would last for 18 years. Each case had the same average rate of return but the sequence of returns was different, which resulted with the first experience being able to provide an additional 6 years to the life of these assets. The GAO report can be found on the agency’s public Web site at www.gao.gov.

Create Your Plan Today

Here are some action steps you can take today to prepare

for retirement:

• Work with a financial professional to fully explore your options for developing your income plan for retirement.

• Understand how your lifetime sources of income work, like Social Security, and explore possible ways to increase these sources.

• Compare your retirement income with the total amount of your expenses — necessary expenses and comfort-living

expenses — to see if you have a retirement income gap.

• Purchase financial products that can provide guaranteed payments for life or for the life of the surviving spouse, and that can provide protection for unexpected events.

• Follow a distribution/withdrawal plan by accessing pools of assets at certain points in time during retirement. This can help you lengthen the life of your assets, gain the potential benefit of compounding growth and systematically increase your retirement income when you need it most. A financial professional can be one of your best allies when it comes to retirement planning. A financial professional can help you develop a comprehensive, holistic plan that addresses all of your goals and needs—and takes care of the people in your life who are important to you.

What is the best age to retire?

Dr. Daniel Crosby, Ph.D., President, IncBlot Behavioral Finance

You turn to your financial advisor for answers to a lot of questions. How can I diversify in today’s market? What’s the best asset allocation for my risk tolerance? Do I have enough saved for my retirement?
Your financial advisor is one of the few professionals that stays with you over a life-long time horizon. From your first child’s college savings plan, to your first glimpse at retirement, your advisor is in it for the long haul. With extended perspective on your life and savings, it seems logical that he or she would have a quick answer to the question What is the best age to retire? It’s easy to expect a black-and-white answer. After all, you’ve spent years, if not decades together, thoughtfully building a nest egg for your retirement. Your financial advisor can’t answer that question alone. A lot of it depends on you.
Selecting the best age for retirement should take many factors into account. Your perfect age will be based upon a combination of financial, health and lifestyle considerations. While your decision may begin with a review of your finances, it needs to be balanced with several factors.
Here are three to consider.
The best age to retire is…when you can maximize the benefits you plan to draw upon
Before you can retire, do you know your Social Security “full retirement age?” Do you know when you qualify for Medicare? Your financial maturity is best reflected in your understanding of the best time to cash in on these programs for the maximum benefit. The Social Security Administration defines full retirement age as a range from 65-67 years of age, depending on the year you were born. You can begin drawing benefits as late as age 70. Waiting until full retirement age or later allows you to capture the support owed to you under Social Security and any pensions without having to sacrifice deductions for early withdrawals. Medicare eligibility kicks in at age 65. Retiring prior to that age means you’ll need a solid plan for health coverage. Stay informed about Social Security regulation changes.
The best age to retire is …when your savings are adequate to support your desired lifestyle
It’s a cold hard fact…some of us need more time to save before we can retire. The size of your retirement savings account is influenced by how early you began saving, how much you contributed, market performance and how diligent you were over your working career. A well-planned retirement requires a detailed budget for your income and expenses. While most experts agree that you’ll need approximately 70% of your pre-retirement income to maintain your current lifestyle, that too depends on your diligence in maintaining a budget throughout retirement. When you delay retirement to a later age, you gain the opportunity to make up for savings gaps or to elevate your lifestyle.
Remember, perfect planning doesn’t mean you’ll have a perfect experience throughout retirement. Make sure your plan accounts for bumps along the road. A study by the Society of Actuaries detailed 16 different post-retirement risks ranging from financial issues (inflation, interest rates, and business continuity) to unexpected crises (healthcare expenses, loss of independence and change in marital status). With age comes wisdom, but retirees are not immune to risks related to bad advice, fraud or theft either.
The best age to retire is…when you have a healthy vision for your post-retirement life
Retirement isn’t a vacation. In fact, it’s a lot of hard work. Beyond the vacations and the new hobbies, most retirees discover they have more time on their hands than anticipated. Filling that time becomes a challenge, and the frustration is often exacerbated by an impatient spouse who finds the newly retired to be constantly underfoot. Retirees who leave highly visible and engaging careers tend to face emotional challenges too. Defining a post-retirement persona forces you to look beyond your professional experience for purpose and satisfaction. Finally, your ability to enjoy your retirement lifestyle is grounded in your health and wellness; consider retiring early if long-term health is a concern.
There is no best age to retire, but there are best practices to follow as you make that decision. You’re at the right age to retire when you have a solid plan to address these financial, social and health issues.

Source: “Managing Post-Retirement Risks: A Guide to Retirement Planning” The Society of Actuaries, 2011. www.soa.org

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This material is intended to potentially assist you in planning for your future. Guardian and its affiliates, subsidiaries, employees, agents, and outside contractors, including but not limited to Dr. Daniel Crosby, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Please note that individual situations can vary, and you should consult your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.

How to Create a Retirement Action Plan

Let’s talk about what retirement is and, more importantly, what it isn’t. Yes, retirement is the opportunity to enjoy your golden years and to reap the benefits of a lifetime of hard work. You might even consider retirement to be a reward for a ‘job well done.’

But, retirement isn’t something that’s incredibly well-defined. You are the only person who can answer the questions like What will my retirement be like? and What’s most important to me when I retire?

Creating your retirement action plan is a simple, approachable process. You don’t need an understanding of complex financial projections. But, you do need to consider specific lifestyle and financial issues. As it turns out, simply taking the time to answer a few questions about your expectations is a great start.

Move Beyond the Bucket List

Dreaming is an important part of the retirement planning process. Chances are there is a once-in-a-lifetime trip or experience you have set your sights upon. Balance your dreaming by understanding that the majority of retirement is spent in everyday living. Begin your written plan with your expectations for daily life with family, friends and the community. Consider questions such as:

• How long do I want to work? Will I continue to work in a different role after retirement?
• What kind of standard of living is acceptable? What is a reasonable cost of living?
• What kind of family responsibilities will I have?
• What kinds of personal interests and hobbies do I want to pursue?

Answer the BIG Questions

Take a hard look at what it will take to provide for your basic needs throughout your retirement. As you examine your choices for housing, healthcare and estate planning, you’ll be able to add another solid layer of detail to your retirement plan. Consider these three areas:

• Housing: What is my housing situation? Does it make more sense to rent or to own my home? How much space do I truly need and is there an opportunity to reduce costs?
• Health Care: Am I relatively healthy? Medicare isn’t available until age 65, and it may be cost prohibitive to purchase individual health insurance before that age. Also consider chronic conditions and end-of-life care. The Journal of General Internal Medicine researched end-of-life medical expenses (in the last 5 years of life) among older adults. Typical expenses range from $38,000 to over $100,000 depending on individual needs and the level of care provided. Your retirement plan may need the capacity to provide a lump sum payment towards the end of your life span.
• Estate Planning: What kind of legacy do I want to leave to my family or to my community? Are there assets, investments or property that should be factored into the plan?

Take Action

Now that you’re armed with your expectations for your lifestyle and essential needs, you can calculate how much you need to save for retirement. Your investment portfolio and supplemental forms of income, such as Social Security, pensions or annuities, form the foundation of your plan.

• Calculate How Much You Need to Save: Aim to save at least 10 to 15 percent of your annual income throughout your career. Professionals who reach their 40’s or 50’s without starting a retirement plan need to save two to three times more in order to make up for lost time. If you’re close to retirement, increase your savings as much as possible.
• Decide When to Draw Social Security: The Social Security Administration allows you to draw benefits as early as age 62 or as late as age 70. Understand that drawing benefits before your full retirement age may reduce your benefits by about 30% (or about 32.5% if you’re drawing benefits as a spouse). For those born between 1938-1958, full retirement age ranges from age 65 to age 67. Full retirement age is 67 for those born after 1959.
• Partner with Trusted Advisors: Resist the urge to let your company 401(k) or other retirement account go on autopilot. Turn to the experts to take you where you want to go. Many individuals work with a financial professional, an attorney and an accountant throughout their career and the retirement planning process. Select advisors based upon a strong connection and personal fit. Establish clear expectations for service level, communication and fees in order make the most of the relationship. And if you are not working with advisors, ask a close friend if they have any referrals.
• Uncover how your personality impacts your retirement strategy. Visit theRetirement Style Matters website to gain insight into who you are and how it impacts how you invest. We’ve identified four different retirement styles, or personalities. Which are you? To find out, take the “What’s My Retirement Style” personality assessment. Does it accurately capture your personality and financial mindset?

Remember, retirement is fun. But, the most important part of retiring is the simple act of planning it.