The Great transition: From creating wealth to preserving it

Have you ever noticed that the skills and actions that can get you to a place where you can retire from full time paid employment are quite different from the skills and actions necessary to keep you in that enviable position? The distinction is important to think about and understand. Making money, versus preserving wealth, require completely different skills and mindsets.

Consider some extreme examples of people who succeeded wildly in the creation of wealth, but did not have skills in preserving it. A Sports Illustrated article a few years ago reported that 35% of NFL players are either bankrupt or under financial distress within two years of retirement. The article also estimated that 60% of NBA players and 78% of NFL players file for bankruptcy within five years of leaving the sport.

This is not a new problem. Consider Mark Twain. He not only made a lot of money with his writing; he also married a wealthy woman. But as he admitted, he was addicted to risk and was constantly in debt from failed ventures. He offered this apt advice: “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

Not many readers of this blog can command the salaries of professional sports figures, or write bestselling books like Mark Twain. But many of us have learned the keys to growing wealth which include investing in our careers, taking risks in diversified investments, and staying invested for the long term so the power of compound interest works in our favor.

Just about anyone in America, who will live below their means, can eventually accumulate a significant nest egg for retirement by regularly investing in low cost index funds without trying to time the market. Many of us who have practiced those habits for decades have nice nest eggs because of the discipline of saving and investing wisely. Life is good.

And then it all changes!

Whether we are seeking a traditional retirement after 40 years of work, or early retirement as part of the FIRE movement, it can be a shock. Suddenly we don’t have a regular paycheck and a 401(k) contribution. We are put into a strange new world of retirement where we plan to draw down on our savings and find new purposeful things to do in life besides going to work every morning.

In fact, lots of retirees have a problem transitioning from saving to spending. What was once a virtue, saving a portion of our income, can become an obsessive vice if we are unable to enjoy the wealth we’ve accumulated and spend it or donate it as we’ve been planning to do for many years.

A successful retirement allows us to relax our animal spirits that in the past always wanted to take on more risk. Additionally, our savings instincts may need to give way to the idea of deficit spending some of our retirement nest egg each year. But we still want to make sure we don’t go broke in retirement. What are some reasonable safeguards we can employ to find the right balance in this new season of life? Here are 7 suggestions:

1. Recognize that when our primary goal in life was creating wealth, we were wired to take risks because we had many years in front of us to recover if something went wrong. Preserving money at the other end of the life spectrum requires the opposite attitude. We need a healthy dose of humility, and, even a little fear to temper overconfidence, if we are no longer generating a paycheck that can compensate if our risk taking doesn’t work out.
2. If we have crossed the finish line, we don’t need to keep running. I loved being almost 100% in stocks in my retirement portfolio in my 20’s and 30’s because I had no need for that money in the short run. Today, I think it’s more prudent to lower that concentration. I know that the market will fall 30% to 50% or more someday. Since I may not have time to make that kind of a decline up, I’d prefer to lessen the risk by lightening up on stocks.
3. We need an objective source to tell us if we have crossed the finish line to financial independence. There are many calculators that can give us a general idea of where we stand. My personal favorite is the retirement calculator from Vanguard. It’s not perfect, but it should give you a good idea of where you stand. You need a few pieces of information to input to get their results: number of years of retirement, savings balance, how much do you spend each year, and your stock, bond and cash allocation percentages. It’s very easy to use. Here is a link to it: Vanguard Nest Egg Calculator
4. As a former banker, I’ve seen the wise use of debt. However, history is filled with the dangers of debt, especially as we get older. It seems like an excellent way to lower our risk as we approach life without a paycheck is to ensure that we no longer have debt on our balance sheet. History provides some interesting support for this view as presidents like Thomas Jefferson died with significant debt troubling him. Ulysses S. Grant was another president who also struggled with bankruptcy and only by striking an innovative deal with Mark Twain to publish his memoirs did he get bailed out shortly before his death. I think all three of these men would have preferred to have spent their final days without their creditors badgering them. It’s no different in the 21^st century.
5. Long term care products can be controversial. But I do know that taking out a policy for myself and my wife was a nice way to eliminate one worry from my life going into the retirement season of life.
6. There are all kinds of theories on safe withdrawal rates from our retirement savings. I’ve read most of them. One popular idea encourages us to withdraw 4% of our retirement savings in the first year of retirement. The second year we would withdraw the same amount plus the rate of inflation from the previous year to keep our purchasing power. This process is repeated every year. This formula has been shown to have worked in the past, but with very low interest rates it has been subject to a lot of criticism lately. The recommendation I like the best is to use the IRS tables with the required percentage minimum withdrawal rates. Here is a link to that table if you would like  see it IRS Required Minimum Distribution Worksheet.
7. In addition to Social Security and pension income, insurance annuities are another way to create steady income that may provide the worry-free retirement you are looking for when the time comes. As with all investment products, safety, fees and an understanding of what you are buying are important considerations in your decision. However, psychologists have found that retirees with a fixed income that covers their living expenses every month tend to be the happiest.

The retirement transition many of the readers of this blog are in, or planning for, is complex. These are some ideas that I think are helpful in preparing, but I’d love to know what you have done!

Joe Kesler, Smart Money with Purpose