Preparing for Retirement? Be Flexible

Gumby is flexible when planning for retirement

This may or may not make you feel better, but you’re dealing with a moving target when you prepare for retirement. It would be easier if you could know with certainty how things are going to go down, but the fact is that you can’t. Knowing that, you can build some flexibility into your plans, and you won’t be shocked when surprises come your way.

It’s not that you shouldn’t take steps to prepare for retirement; instead, think of your retirement as a work in progress. You can’t just leave it on autopilot. However, you can point it in a certain direction, let it go for a while, and make modest adjustments as time passes.

You’ll Never Get It Perfect

Preparing for retirement might be more enjoyable if you just accept that you can’t do everything perfectly. What could possibly go wrong?

Life will throw surprises at you, and your well thought out plans may need to go on hold for a while (or you might even need to take a few steps backwards and use your retirement savings in a time of crisis). I hope that you’re fortunate enough to only have pleasant surprises in your life, but sometimes the other kind pop in as well: health problems, business failures, and other unimaginable disasters can through your course.

Markets are unpredictable, and they may even misbehave. You have to take some kind of view on the markets (whether optimistic or cautious) as you plan for retirement, but you also have to realize that your view could be wrong. What’s more, your view might be almost completely accurate, but you can suffer from bad timing just as you’re getting ready to retire.

You might change your mind about what’s important. It’s best to start preparing for retirement at a young age – starting early makes it easier to accumulate enough to retire comfortably. But what if you’re a different person when you retire? You might value different things. Maybe you have changed your mind about how much income you’ll need (whether it’s more or less than you thought when you were young), charitable giving, family, or whatever else might affect your finances.

Even the “Experts” Change Course

Even if you could plan out your retirement strategy and stick to it, you might not want to. Financial experts continue to figure out ways to do things better. Granted, the “best” strategy is the one that works; one approach might not be objectively better than another, but new ideas might be a better fit for your situation – and you should make use of those ideas.

A few examples include work done by Wade Pfau, Michael Kitces, and others like them who try to optimize the likelihood of a successful retirement. One study from the recent past suggests that the returns that matter most are the ones right after retirement (so you don’t really need to stress when you’re just building assets). Another example is the suggestion to use a U-shaped risk profile once you get into retirement as opposed to continually reducing risk.

As these ideas bounce around among experts, they debate approaches and eventually the wisdom of the crowds determines what strategies are best. As you prepare for retirement, it’s a good idea to keep an open mind about ways you can improve your chances.

Financial Products Change

Change is the only thing that’s certain, and that applies to financial products. Although financial companies (and their “innovation” in particular) are viewed very negatively, sometimes they come up with halfway decent ideas. Hopefully those ideas won’t stink, cost too much, or get pushed down consumers’ throats by unscrupulous salesmen.

Some products that have evolved over the years include annuities and reverse mortgages. In the early days, these products were often expensive and consumers were shoehorned into products that paid nice commissions. Now, these products cost less, they’re more flexible, and they’re available under a variety of compensation models (somebody isn’t necessarily getting a huge commission, although that’s still not out of the realm of possibility). Some of the smarty pants researchers above are figuring out how to use them in sophisticated ways. Even plain-old mutual funds have gotten better.

Products will continue to evolve, and you may find that a few of them meet your needs. It’s worth finding out what’s available and evaluating whether or not something makes sense, or if it’s something to pass on.

The Unknown

Of course, we don’t know what we don’t know about the future. That makes it extremely difficult to prepare for retirement – hopefully a journey that will last 30 years or so. It’s especially difficult if you’re nowhere near retirement (if your 30 year journey won’t start for another 10 years or more). Things will change, and you’ll have to adapt. You’ll make decisions along that way that will turn out to have been “not the best decision.” But all you can do is make the best decision with the information available at the time (and then make adjustments as new information comes along).

What could happen? It’s anybody’s guess. But retirement could change dramatically. I don’t necessarily believe it’s likely, but some people think the government might take control of our retirement (by taking our assets and providing our income in retirement – Social Security on steroids). Conversely, it’s possible that government will back away from retirement, Social Security will go away completely, and you’ll be on your own (see Will Social Security be There? Yes and No).

What can you Do?

The best you can do is to do your best. Save money and do some planning. Make decisions given what you know today, and keep an open mind. From time to time, check in on your progress, and see if you need to adapt to new conditions and information (this doesn’t mean buy and sell when the market goes up and down…). Finally, don’t lose hope if your retirement plan isn’t perfect because even if you managed to make it “perfect,” it wouldn’t be perfect for long.

Photo credit: teamstickergiant