Alvin Hall, The Keys To Financial Freedom In Retirement

When I was in my late 20s, I worked with a lady who had recently retired. Virginia (as I will call her) volunteered a few days each week at the public-service organization where I worked. One day, as we were assembling materials for a direct-mail publicity campaign, we began to talk about money.

I will never forget the wisdom that Virginia passed on to me that day. “When you are young, you spend money to get to know who you are—what you like, what you don’t like, what you may want in the future. Once you’re older, you will spend less because you know you who are. Many choices are clearer and easier.”

As I approach the age of Virginia when she spoke those words to me, I think about them often. I wonder: Do I really know what I want the senior phase of my life to be? And every article I come across about the financial needs and strategies of seniors automatically grabs my attention—partly because I am a financial educator, but even more because of my personal concerns— those quiet fears that sometimes lead to restless nights. Questions, rational and irrational, materialize in my head, feeling menacing and foreboding, as if presaging a downward spiral into financial chaos.

I wake up worried, but as the daylight gets stronger those unsettling thoughts dissipate. The reason is that I took Virginia’s wisdom to heart. The fact is that I know myself pretty well at this point, and I have a clear idea about the choices I will need to make to be financially secure, contented, and vital in my old age.

Determine the Lifestyle You Want and Can Afford

The big financial questions I face as I approach my golden years really come down to a single question: Given my financial resources and my ongoing financial commitments, what kind of life can I afford? What seniors want is to have a retirement income well-aligned with their needs and desires— and that means something a li le different for each individual.

For this reason, it’s important to figure out in advance what your incomings and outgoings will be during this new phase of your life. Depending on your mindset and comfort level, the numbers can be a rough or detailed. For most people, the more information you have, the better. This way there are unlikely to be any unfortunate surprises.

The first question to ask is what you hope to do in old age. Which of these describes your main goal?

• To luxuriate in a life free of schedules and daily commitments.
• To continue working in your chosen profession, but at a less intense level, perhaps letting it slowly wind down over me.

• To supplement your retirement income through additional work in order to meet primary obligations, such as children still in school.

• To replace work with voluntary activities at a cultural or arts organization, a local charity, a hospital, or an after-school tutorial program.

• To travel the world or move to a different area or country for a lifestyle you’ve long dreamed of.
• To help your children get on the proper- ty ladder and/or set money aside for the future education of your grandchildren.

Each decision has financial repercussions. Establishing your goals and objectives in advance will help you assess what your retirement lifestyle is likely to cost and what adjustments you may have to make. Of course, once you actually see what the reality is, further adjustments will need to be made, but these should not be totally surprising or severe.

Assess Your Risks

Perhaps the biggest worry most people have about retirement is the fear of outliving your financial resources. Given increasing longevity, this risk is especially significant if, like so many people nowadays, you lack a traditional pension or an annuity that will pay you for life. One way to reduce this risk is to follow a model that dictates how much of your nest egg you should draw down each year. The classic guideline is the “Four Percent Rule.” According to this model, if you spend approximately four percent of your nest egg each year, your remaining funds (savings, investments, and so on) should last your entire life me. You can gradually increase this percentage each year as your me horizon (i.e., your life expectancy) shortens.

However, there is some new research that others other guidelines based on changing interest rates and the performance of the investment markets as well as the individual’s me horizon. Regardless of which approach you take; the key is to have a plan in place and then reassess and adjust it periodically as economic and personal conditions change.

Another significant risk factor—one that is insidious because it is essentially invisible. Over me, in a on erodes your financial security by reducing the purchasing power of your money. During a period, your nest egg’s value—that is, the amount of goods and services that can be bought with it—will decline because the costs of those good and services increase faster than your money grows.

The rest of this editorial will be published in print.