“How can I make my money last as long as I do?”

“Money - if it does not bring you happiness, it will at least help you be miserable in comfort.” Helen Gurley Brown

There are three guiding principles about your money and your life. They are simply:

1.         Making Money
2.         Spending Money
3.         Saving Money

The three principles are all tied together. Before you can spend it, you must make it. Then, if you spend too much you can’t save it. So, you would have to go back and make some more – or spend less.

The principles are easy to understand but, at times, very difficult to follow. Yet while we are gainfully employed, we appreciate that if we slip up on one of them, we still have an opportunity to make amends, then re-balance the other two. In our earning years our cash flow month to month can get out of control but while we stay in employment, we know we can fix it because we have next week or next month’s income coming in.

The problem comes in when we retire.

One month the paycheck comes in, the next month it doesn’t. it can be a terrifying moment, particularly if you haven’t planned for your retirement and haven’t given any consideration to how you will feel when the employment cash flow dries up. Gone are the days of being able to save for your retirement. Equally alarming is that you have now lost the opportunity to say, “I should be saving more for my retirement.”

To make matters even worse the next life issue arises.

“How long am I going to live?”

You now realize there is a finite correlation between life expectancy and your retirement fund. Now it is not just the accumulation of money that has been lost but the forward calculation of how long you will live comes into play.

Suddenly you are trying to work out how much income you will have going forwards year over year, how much spending you will have going forwards year over year. You fear the result that your projected income will not cover your projected income and that you will dip into your savings account to use for daily cash flow – thus reducing your savings and the interest or dividend spin-off from your savings or investments. You suddenly realize that your pension income won’t cover it.

If that forecasting is done early enough in your life and regularly checked, there is time to fix the future.

However, in order that you can be sure your retirement fund will last as long as you do – and not forgetting the plan to leave money to the kids - or perhaps not - there are some adjustments to be considered.

According to a report from the Stanford Center on Longevity (SCL)*, in 1950 a 65-year-old man could expect to live to age 78, or an additional 13 years. By 2010, a man age 65 could expect to live to age 82, or 17 years longer. A woman age 65 in 1950 could expect to live another 15 years, to age 80, but by 2010 her life expectancy was 84.

*(Stanford Center on Longevity - https://longevity.stanford.edu)

Unfortunately, we don’t know how long we will live, but it is fair to say that given today’s health care and our own awareness of health issues, we can reasonably expect to live longer than our parents perhaps, and certainly our grandparents, by and large.

In the 1950s for example, the word “retirement” had a rather sinister meaning. It was the run-up to the “end”. Longevity was not a word in common use. People expected, and accepted that their days were now numbered, so the need to forecast income and expenses was largely ignored. Of course, in those days, if you had a pension from your job, it would most likely have been a Defined Benefit Plan (as opposed to Defined Contribution Plans today) – this provided a known and guaranteed pension from your employment until death. Therefore, there was little, if any, need to worry whether your money would last.

But times have changed.

        You are part of the longest living generation in history. You could be in retirement for 20 or 30 or more years. If you expected to live for less than that - or perhaps you never considered your life expectancy at all, then you could be in for a big surprise.

         Today the word “wealth” is completely in line with the word “health”. If you have wealth but lack good health, then the retirement fund may be adequate. On the other hand, if you have excellent health, then your wealth and its longevity is a serious issue to consider. How can you make sure you will have enough money to last?

        Financial literacy was a phrase barely heard outside the halls of academia. It was never use in everyday language in the home. People understood the words bank, bank account and savings, but that was about all. Interest rates were stable and were typically unknown. Interest was simply paid. But these days, especially due to the change from Defined Benefit Plans to Defined Contribution Plans, the need for a much better understanding of financial terms and meaning is essential.

According to Zuri Darrel, VP Investor Services, Butterfield Asset Management:

https://www.butterfieldgroup.com/investments

“Financial literacy is becoming increasingly important in today’s world. The constant introduction of new types and new classes of investments, the growing prevalence of defined contribution pension plans, and the protracted low-interest rate environment we’ve experienced mean that people need to understand their options to self-direct the investment of their money for good returns. With a better understanding of the characteristics of different kinds of investments, one can make better informed decisions about their assets. “

        Taking early retirement is a popular decision nowadays. Sometimes it is forced on employees through redundancy, downsizing etc, but most times early retirement is offered voluntarily by the company. You can take it or not. Yet one issue to consider is that early retirement combined with increased life expectancy can easily result in an even longer time in retirement to be funded.

         During the working years, the act of saving over and above contributions to your pension fund either compulsory or voluntary (an excellent method to boost your overall savings while still employed) is to be applauded. Saving is good for you. But, as you approach retirement or if you are already in retirement, your investments may need a look-over - if not a make-over.

We can still remember the 2007/8 banking crisis when anything up to 40% of investment accounts were lost. While some has come back, we are today in Year 2021 facing an increased stock market, reaching new highs and causing our pension pots to grow nicely. We like that. But what if a correction, maybe a serious correction is around the corner? Should we be thinking about that now and what to do to prepare?

Mr. Darrell says:

“With the market continuing to reach record highs, the risk of a pullback is always on the cards. With a well-balanced portfolio, diversification of your assets across investments in different types of securities, geographies, and industries, and regular rebalancing, you can protect your portfolio from market corrections. A long-term plan that is carefully managed and fit for purpose based on your risk tolerance and time horizon is more likely to perform as expected, helping you avoid nasty surprises.”

      Carrying debt is another issue to be seriously considered as you approach retirement. The maxim that “Cash is King” in retirement holds true. Yet if you are still paying off a mortgage or credit cards as you go into retirement, you may be reducing your spending power significantly. When the mortgage was being paid out of monthly salary it had become a normal expenditure which was covered by the salary. But now the salary has stopped. What now? It could make an enormous difference to your cash flow if you could pay off the mortgage or credit cards before you retire - albeit out of savings thus reducing the investment income spin-off. The cash outflow within your retirement budget will benefit greatly.

        Revising your spending habits is always a good idea. For some people in retirement however it is more than a thought, it is a necessity. Some of the luxuries in life you have enjoyed while fully employed may have to go. Maybe the two cruises a year need to be cut back to one. Maybe you don’t need that big car. New clothes are always popular – but do you need that smart business suit these days? For some it is a dreadful thought that they must cut back on the “must have stuff” but if the retirement financial plan hasn’t been constructed properly, the choice between groceries and prescriptions could become a realty, especially in the later years.

        Lastly, if there is a projected shortfall in your retirement budget – where the projected income is less than the projected expense for the rest of your life, you may choose to keep on working in the retirement years or at least work part-time. There are many social benefits in doing so, but if the decision is based on a need to “fill the gap”, then your retirement years - especially as you get older - could become a very critical health challenge. You may just not be up for the job. Then what do you do?

Conclusion

Making your money last at least as long as you do is a difficult proposition. It requires guesswork and reasonable forecasting. But the over-riding advice is to start saving as early as possible, and as hard as possible. Small sacrifices today will accumulate over time and make your life, and perhaps your family’s future all the better.

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