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Chief Investment Officer
About ten years ago at a party after one of my son’s water polo tournaments, a bunch of the dads started talking about the musical instruments we knew how to play. …
Among the group, we had a guitar player and drummer (who both could sing), a bass player, and a harmonica player. I told them I played the saxophone for the Michigan Marching Band, but that I hadn’t picked up my instrument for decades. After some serious encouragement, they convinced me to grab my horn. They handed me the chord sheet for a few songs. I laughed. Saxophones don’t play chords, and it was in the wrong key for my horn. Somehow, I managed to join in. It was so much fun, we decided to do it again. And again and again. We later added an electric guitar player to the mix, and now we’re a full-fledged, hobby garage band playing jazz, blues, and old school rock (including Tom Petty). We go by the name 6 on 5 which is a water polo power play that gives your team an offensive advantage after a penalty.
Last month, we played at the Dexter Daze Summer Festival in one of our first public gigs. We have had a few other gigs, but this was the first one with a real stage and professional sound crew. Even though the crowd was small and consisted mostly of friends, family, and coworkers, we had a ball. It felt like we were cosplaying as rock stars. You’re probably wondering what this has to do with retirement planning. Maybe nothing…or everything.
As investment advisors, we use financial planning tools to help us provide the proper risk structure in clients’ portfolios and to counsel our clients on all of their financial decisions.
After creating, updating, and analyzing thousands of these plans, my way of looking at retirement has evolved.
Financial planning software is quantitative. We input some key variables like spending and savings amounts, investment account information, Social Security benefits, and pensions. Then, the software calculates probabilities of success using different asset allocations in your investment accounts. In this simplistic view of the plan, there are essentially four key variables. Spending and savings levels are two of them, and prior to retirement, these variables are perfectly inversely correlated with each other. In other words, a dollar spent is one fewer you have to invest. In retirement, adding to investment assets is rare (though it does occasionally occur). The next key variable is age of retirement. The later in life you retire, the more you can save and the fewer years you need your money to last. It also usually increases your social security and pension benefits.
There are other important variables such as the type of investment accounts to use (ie, taxable accounts vs 401k’s and IRAs – the traditional variety and Roths, Roth conversion strategies, Social Security, pensions, real estate, and others).
These variables are used more for fine tuning and optimizing a plan. The four key variables (spending, savings, age of retirement, and asset allocation) are the ones that make up a majority of the success or failure rates of retirement plans.
Early in my training, these numbers meant everything to me. It took the emotion out of decision making. The task was simple, optimize the plan for the highest probability of success with the least amount of risk. After decades of reviewing plans with actual, real people, I learned the importance of qualitative considerations. Yes, it is important to make sound financial decisions. But really, the plan is just a tool to provide perspective and context to what you can do with your money. There are certainly consequences to spending too much relative to your investments. However, the spending variable isn’t really the key; it’s what you’re spending your money on and your reasons for doing so that matters more.
This brings me back to 6 on 5. Consistently getting together with a group of friends to jam and hang out brings a tremendous amount of joy to my life. Stretching my comfort zone by learning to play a completely different style of music than I had previously played, and playing on a stage with a microphone exhilarates me. My band experiences have enriched my life, and so my decision to go to band camp to learn from professional musicians a few summers ago was money well spent.
This ‘why’ spending variable is different for everyone.
I had a young client who had a goal of retiring by 45. Her career didn’t provide meaning to her. Still, while we could get the plan to work using a high level of savings, the spending levels in retirement had to be relatively small. The key question for her was, “What will provide meaning on a day-to-day basis over the next 45 years?” When she decided she’d need to spend a bit more in retirement for it to have meaning, she knew she’d have to work a bit longer. One couple uses the tool to estimate when they will run out of money. The prospect of depleting their savings doesn’t bother them. They’d rather spend every last dime while they physically can and then live on their social security and small pension the rest of their lives. Having a plan like this used to bother me a great deal, but I don’t see a problem with their plan now. They understand the consequences of using their resources, and that is their choice to make.
For many others, the success of the plan isn’t in question, but the why always is.
Travel is how many clients answer, “Why?” Many fulfill their why by volunteering, greatly benefiting lots of worthwhile organizations that value the expertise clients acquired throughout their careers. Many will use their financial resources to help others either through charitable giving (and we can advise on the optimal ways to do that) or as gifts to family members. The financial hurdles for today’s youth are significantly higher than for my generation and the previous ones. Many have student debt levels that rival mortgages. Heath care costs have gotten out of control. Housing prices are through the roof (pun intended), and the disparity of incomes for different careers is staggering. Gifting to kids and grandkids while you’re still alive can be a wonderful way to provide a good why to your spending.
