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Are you Ready for Retirement: Part 1

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Gavin and Jenny looked tired.  They sat down across the table clutching their financial documents.  We poured a cup of tea for everyone and prepared to have an honest and open conversation.

Gavin looked over to Jenny, then on to us, “What I really want to know is, am I able to retire?”

And that’s the important question thousands of New Zealanders are asking themselves each day.  With their permission, we like to rephrase it slightly, “Am I financially independent?”

In other words, “Is work now optional?”

…And If not now, then when and how?

That’s the right question to ask…and an almost impossible question to answer.

Why?

Because almost everyone wants (or should want) an answer with three or less letters: “yes” or “no”.

But the most honest and truthful answer any professional could provide is,

“Let me look at what retirement means to you.  You know – your lifestyle and longevity, the estate you’d like to leave your children and so on.  Then I’ll be able to tell you the probability that the results work out as well as you’ve described, if not better.”

The key word there is ‘probability’.  Unfortunately, that’s an 11 letter word!  But it’s an important word because it acknowledges that the future is not certain.  All assets – cash, fixed interest, property and shares – may have greater or lower returns than anticipated.

Some advisers hold out that they can predict the future.  Other advisers embrace that the future is uncertain and we need to plan on that uncertainty so we don’t get caught out.  We’d fall into the latter category.

Further, given that most of us want to plan on a long retirement, say 30 years or more, how can anyone claim for certain what returns will be like 30 years from now?  30 years ago from today it was 1989.  A lot can change in 30 years.

So turning the question, “Am I able to retire”, into a question about probability is the most appropriate and honest way to answer the question.

The reality is simple – if retirement to you means living on $100,000 per year but an honest conversation with your adviser led you to believe that wasn’t sustainable, you’d probably adjust down your lifestyle.  And doing so would increase the probability of you being able to achieve your retirement goals.

So whatever the probability, we must always understand it’s adaptable to change.

How do we calculate the probability you’re ready for retirement?  We really need the following pieces of information as a minimum:

  1. When do you want to be financially independent?
  2. How long do you want to plan for retirement (how long do you think you will live)?
  3. What amount of spendable cash do you want per year?
  4. How much do you want to leave your family?
  5. How much can you save per year between now and when you aim to be financially independent?
  6. How much risk are you are willing to take with your money?
  7. What are your current savings?
  8. What certainty would you like that your goal works out at least as well as you’ve planned on, if not better?

It is the combination of these answers that define for you what “financial independence” really means.  I’ve never met two people with the same answers… ever.  Retirement is very personal and very unique and thus your retirement strategy must be personal as well.

With the answers to these questions we can determine the probability that your retirement will be as good as you’ve described, or even better.  By ”even better,” I simply mean that, as the years go on, you can take larger withdrawals than planned for, leave your family a larger inheritance, etc.

With the answers to these questions we’re well on the way to answering Gavin’s initial request, “What I really want to know is, am I able to retire?”

But the honest truth is…there’s still a lot to do in order to turn the answers into a strategy that will work.

And, when the answer comes back to Gavin and Jenny, “The probability is only about 25% that this will work out as well as you’ve described or better,” what do they do now?

More on this next time…