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We All Become Financial Planners WHEN We Retire

Simplistic retirement calculators love to show forecasts with a set of assumptions before, then after retirement.  Up go the assets, down go the assets in a nice peaked curve.  I think this glosses over some of the most critical realities of retirement planning.

We become professional portfolio managers (or more reliant on them).  For most of our lives, we live off of our wages.  That’s our profession and priority.  Once we retire, with or without the aid of Personal Financial Planning Software we live more or entirely off of our investments and we usually need to plan to do so for at least 20-30 years.  As retirees, we need a plan for those years and the best plan is going to evolve over time to reflect the an array of considerations to serve us best.  How we manage our portfolio remains as complex and critical as ever and as a result returns and volatility will vary over time during retirement.

retirement plan forecast
If your forecast looks like this, you probably do not have a very good plan.

At the onset of retirement, at least half of our investments can be considered “long term” if we define that as money we won’t need for 10 or more years and some portion won’t be needed for 20+ years.  Each year the long term portion of the portfolio gets smaller, but for most of retirement it will not make sense from a risk/reward perspective to switch entirely to short term low volatility investments.  Unlike in most of the years before retirement, our portfolios not only need continual re-balancing to maintain a target asset allocation, but conditionally the asset allocation needs to slowly change every year as we approach the end of our Life Expectancy.

All retirement is not the same.  65-75, 75-85, 85-95 are likely to represent different lifestyles, income and expense profiles. Your retirement plan should explicitly reflect this.

Early retirement may include a lot of travel plans and no major changes in spending tied to lifestyle. Maybe you’re not ready to move out of your family home yet even though the kids are off.

As we get older, our priorities may shift with some expenses declining over time, others taking precedence.  We may shift away from more expensive travel or downsize our residence.  We may need to budget more for medical expenses or some in-home care at some point.  Each period requires a unique spending expectation, ideally in the form of inflation adjusted budgets.

Income may change as well.  it is not uncommon for a recent retiree to define retirement as “working on what I want when I want” as opposed to “not working” so there may be income to plan for even during retirement.  By the time your 85 this may decline or stop.

Your financial forecast needs to explicitly include and adjust for all of these changes over time to be a realistic projection of the planned life your finances need to support.

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