I’m not much of a golfer. Perhaps that’s explained by the fact that I get out on the links maybe only two or three times a year! They say practice makes perfect, but for some reason, I don’t think that applies to me and the game of golf.
Tiger Woods' recent exciting Masters victory suggested to me the similarity between retirement planning and the idea of the lag putt. For readers who don’t know golf’s lingo, a lag putt is one that isn’t really meant to go in the hole. Instead, it is a putt that’s supposed to just make the next shot a “gimme.”
Getting to a financially secure retirement is similar. It feels like one lag putt after another until the ball finds the bottom of the cup. It’s a gamble to base your retirement on a lucky stroke.
After analyzing and creating retirement plans for many years and many clients, I’ve found there are really only three variables to consider. It’s not rocket science. It’s more like a little math.
The first thing to consider is time. Creating a retirement plan projection for a 35-year old is vastly different than one designed for a 60-year old. In my financial planning work, I often imagine a person’s remaining “economic value” while they are still working. When you’ve only got about 5 years of active work left out of what’s likely to be a 50-year work history, about 90 percent of your economic story has already been told. Your ability to build up financial resources through additional savings is limited by time.
The next input is your accumulated financial resources that will provide the cash flow needed to sustain your retired lifestyle. These include your various investment accounts, that small business you hope to sell, your rental properties or the real estate equity you’ll free up when you decide to downsize. This also includes any pension benefits you’ll get and, of course, your projected Social Security benefit. It’s really just a comprehensive tally of what’s been built to date.
The final variable — the most important of all — rests on the cost of your desired retirement lifestyle. And, outside of your mortgage or other debts you plan to pay down before retiring, your core retirement lifestyle will probably mimic your current one. Any sound retirement plan requires you to reasonably define your life’s costs. While most financial planners work to avoid the dreaded word, a comprehensive retirement plan does require you to have a handle on your household budget.
Just like any round of golf, the course of a lifetime of retirement preparation is littered with hazards and obstacles. The occasional sand trap or tree limb or awkward swing closely mirrors that untimely lost job, unfortunate divorce or unexpected repair — not to mention recessions and bear markets. It’s all par for the course.
Eventually, through sound planning, deferred pleasure and emotional flexibility, the final stage of your own retirement journey can look like Tiger’s masterful round where all that remained was his boring lag putt followed by a short gimme.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com.