Re-Thinking Retirement After the Crash

The current financial crisis reminds me of a cartoon I saw years ago in Paris. A bungee jumper is worried about taking the jump off the bridge, so he checks his harness. Fine. He checks its connection to the bungee cord. Fine. He checks the cord itself. Fine. He checks the connection of the cord to the bridge. Fine. Reassured, he jumps and the bridge breaks!

The financial bridge under many of us has broken. This is particularly destabilizing for retirees and those soon to retire. They followed all the rules about diversifying their investments. They checked and double-checked the fundamentals. Finally, they took the plunge and invested carefully. But now they are drowning in the river below without a life raft, and with no idea how to get back up to where they were such a short time before. “I did everything right! It’s not fair!” they cry.

No doubt markets will come back once this crisis is over, but it will take some time. It’s like a patient in need of surgery. His health precipitously declined, he had the operation, it was successful (at least so far), his vital signs rebounded, but there is still danger of infection and full recovery is still quite far off. And older investors do not have the benefit of a long horizon. Many are depending on their savings and investments for current “life support.” Their financial life expectancy, representing. how long their money will last, just got a lot shorter.

In times of loss, it is instructive to remember Elizabeth Kubler-Ross’ “grief cycle.” Initially, most people enter a state of paralysis, not knowing what to feel or do. Classically, this phase is followed by denial, anger, bargaining and depression until finally, acceptance of the new reality. Of course, no one actually moves consecutively through these stages. They are more like cycles, and therefore we tend to both accept and deny, bargain and feel paralyzed in repetitious, frequently overlapping mood swings. However, once we have accepted that our circumstances are forever changed and that it is now our job to deal with the new reality, we can begin to rationally analyze our current situation.

So once you have gotten to acceptance, what do you do first? Counter-intuitively, you shouldn’t begin by seeking advice from financial journals and developing a new financial strategy. Such a radical change requires a new way of thinking, a re-evaluation of your life to determine what is really important to you and what is not. “All of the above” is no longer an option.

Your objective is to create a psychological base about yourself by examining how and when you have thrived, in order to give you the confidence and momentum to address your future. Start by remembering two or three situations where you were performing at your best, you were using all your talents and were so involved in what you were doing that you lost all sense of time. Where were you? What were you doing? Who were you with? Were you directing the effort or were you part of a team responding to a challenge? Or were you singularly addressing and resolving a problem?

These “memory exercises” will give you important insights regarding what psychologists call your “motivational needs.” From these memories, you can also deconstruct what your interests are and your style for pursuing them. If you want to go even deeper, you can also use an in-depth “personality profile,” such as the Birkman Method.

Now you have great information to help you figure out what you want to do in retirement. How will you re-create your previous “flow” experiences? These do not necessarily have to be in a work-related context. But it will help if some of them can be done in a way which will result in additional income. Any additional income will reduce the amount of money you need to withdraw from your retirement accounts. Studies have shown that working only 30% in the first five years after retirement will result in a portfolio which is 40% larger at the end of that period.

The next step is to develop a new strategy for your retirement. Prioritize those things which are the most important to you. Develop for yourself a “New Life Plan” which will include those things which will make you satisfied and fulfilled. Include the details of your new life. Where will you be living? What will you be doing? Who will you be doing it with?

Finally it’s time to consider the financial implications of your new life. Having made your plan, now you need to estimate what it will cost. Use past records to determine your anticipated spending patterns (bank accounts, credit card statements, ATM cash withdrawals, etc.). Make a monthly budget first, then convert it to a year, and add in any anticipated major extraordinary expenses (vacations, property/income taxes, a new car, a new roof, etc.). Don’t forget health care costs and a reserve account for unexpected contingencies. When you have your best estimate of your annual budget, divide by 12 to convert it back into a monthly estimate.

Now look at where your income will come from to support your monthly retirement lifestyle. Traditional sources are social security, pensions, non-retirement investments, 4% annual withdrawals from your retirement accounts, and any work-related income from part-time work, hobbies, etc. If, as expected, your income projections do not met your needs, go back to your New Life Plan and your memory exercises and determine what is really important to you and what is not. Re-do your strategy until the income and expenses are in balance. This will put you on good footing for the future.

If markets come back more quickly than anticipated, you can always readjust your lifestyle accordingly. But living within your means is important so that you do not deplete your resources prematurely. You don’t want your friends saying, “The surgery was successful but the patient died.”