If this is your first time visiting our money marathon series, we are currently using running analogies to show you how you could get more potential mileage out of your hard-earned money.
Here’s what we’ve covered so far:
Strategy #1: Know your why.
Strategy #2: Why you need a contingency plan.
Strategy #3: What to do when your plan hits the fan.
Strategy #5: Have a backup plan for your plan.
Today’s topic is how to help prevent a financial crash in retirement. If you’d like to watch the video for today’s post, you can find it here.
I believe preventing a crash in retirement is similar to preventing a crash or hitting the wall in a marathon.
The first step is really to understand what causes a crash. And once you understand that, then, we can explore ways to prevent a potential crash or run out of money or financial fuel in retirement. When running a marathon, there are four common reasons for running out of fuel and crashing or putting you at risk of a DNF (that stands for do not finish).
Cause #1: Not knowing your pace
So, crashing cause number one is not knowing your pace. If you have a goal marathon time, like me and many others who are trying to achieve a personal best, or maybe qualify for the Boston Marathon, you need to know your goal pace, and you need to practice training at that pace during some of your runs. Not all of them, but maybe a couple per week, and get your body used to that pace.
Securing your financial future is very similar. You need to know what pace you can spend at in your plan. You want to have a plan that won’t crash in good markets, average markets, and challenging markets, so that you can feel secure in your future.
In a separate video, I dive into the importance of knowing your paces, specifically your spending paces. Just like my running coach has me training near my goal marathon pace a couple of times a week, I believe people should practice their plan’s spending threshold pace so that they can be confident that they can sustain their paces and prevent a potential crash, in case they’re going over their pace and they don’t know it.
For example, I put together a hypothetical client, Bob and Betty. They came into my office and were worried about running out of money in retirement. Their plan shows that they were at risk of a financial crash and though it worked 56% of the time, 44% of the time their plan failed and ran out of money. It essentially ran out of fuel and crashed.
Betty wanted to be more confident in their future and said, well, what if we delay retirement by one year? What if we reduce our spending to $7,500 a month? And as you can see in the picture below, the plan’s probability of success went way up. It went all the way up to 80%.
Bob and Betty’s homework was essentially to go out and try spending at $7,500 a month and see if it works. Bob’s comment to me was “I’m gonna retire at 63 no matter what, and I’ll work part-time because I want more time with my grandkids.”
That’s a hypothetical story and past performance doesn’t guarantee future results, but hopefully, it can show you the value of knowing your paces and practicing those paces so that you can feel confident in your future.
Cause #2: Not having a contingency plan
Cause number two of a financial crash in retirement is not having a contingency plan. So, whether an illness or other catastrophes like running out of toilet paper in the Jimmy John could slow down a runner’s time. It did for me! So, if you want to learn more about the importance of a contingency plan, and what might happen if you don’t have one, and what to do when your plan hits the fan, click here and here.
Cause #3: Inadequate fueling
Cause number three of a financial crash in retirement is where we’re going to spend the most time today, and it is inadequate fueling.
If you don’t have enough fuel in your vehicle on the road, you can get stranded. For runners, if you don’t have enough fuel in your body in the form of carbohydrates or glycogen stores, you can hit a physical wall. Science teaches us that physiologists know that this wall they talk about runners hitting about mile twenty isn’t just mental. It’s actually physical.
There’s a certain amount of carbohydrates or glycogen stored in your body that your body can hold. And if that’s not adequately filled up before the race, you can hit a physical wall because you’re out of the fuel you need to run fast. Your body needs adequate fueling to reach your potential, and planning to secure your financial future is very similar.
Depending on your age, you could have 5 years, 10 years, or 50 years of financial fuel required to get you to the end of life. And while everybody’s plan is unique to them, every investor, every family, every person I talk to, wants to finish their race. They want to finish their life without running out of money.
So let’s talk about it. Let’s talk about what can runners do, and what can investors do to potentially avoid running out of fuel. Recently, I ended up crunching some numbers, and I found that I need to have 8 to 10 grams of carbohydrates per kilogram of body weight each day, for three days, to be adequately fueled up before my upcoming marathon in Kiawah Beach in Charleston, South Carolina.
And I obviously want to reach my potential. I don’t want to run out of fuel, so I crunched the numbers, and this is crazy. I need to consume 618 grams of total carbs per day for three days.
To put that perspective, I need to eat 232 4-inch pancakes, 44 cups of pasta, or 48 cans of Coke over three days. Wow, I had no clue how much fuel I needed to finish that race at my potential! And I am glad I crunched those numbers, otherwise, I definitely wouldn’t have fueled properly and I probably would have crashed or fallen short.
So planning to secure your financial future also requires crunching the numbers. My personal preference is that someone has enough financial fuel in their retirement gas tank that would allow their plan to work at least 80% of the time when we run the plan through a historical stress test. That means historically, if you run the numbers, your plan doesn’t crash 80% of the time. 80% of the time it works, and you get to the end of life with extra money, and 20% of the time it doesn’t work.
And in those situations, usually, the adjustments are smaller. When we crunch the numbers, we typically find two outcomes for clients.
The first is that people are surprised at how much fuel it will take. Just like I was surprised with how many carbs it would take to be fueled up for my marathon. And when that happens, they just realize they might need to adjust their fueling and retirement strategies and tweak those. At One Life, we get behind them, we roll up our sleeves and we figure out how can we improve the odds of avoiding a crash.
The second outcome is investors see that they’re on track to have too much fuel. For example, a couple I met with yesterday projected to have a couple million dollars more at the end of life than they wanted or needed. And that was a fun conversation because they got to explore what they might do differently and how they might live their best life differently because of those projections.
For some people, when they see a surplus, they might want to retire sooner. They might want to work fewer hours to have more time with loved ones. They may want to give more money away to help kids with their crazy high student loan interest rates, paying those down, or maybe they want to give to charity or experience more by traveling or just enjoying life out.
So if you have not yet crunched the numbers to see if you have enough fuel to help avoid a crash, consider making a goal to develop or update your plan sometime within the next month, two, or three months tops. If you don’t know how to crunch those numbers, our One Life Financial Group team has some great coaches; we’d be happy to help you do that to see if you potentially have enough fuel in the tank to avoid a financial crash in retirement.
So, that is cause number three for a potential retirement crash. It’s not having adequate fuel.
Cause #4: Inefficient financial strategies
Cause number four is inefficient financial strategies, which we will dive into in a future post and video. Inefficient financial strategies could include things like paying too much in taxes or paying unnecessary taxes. It also might be inefficient 401(k) management or just not doing 401(k) maintenance (where you set it and forget it), or maybe you let your employer choose your investment options.
So stay tuned for that video where we’ll cover that topic more in-depth. And as usual, I hope you learned one or two ideas that could help you potentially get more mileage out of your money.
If you’re not a client and want to create a plan that could help prevent a financial crash in retirement and help secure your future, tap the button below; we’d love to hear from you.