Retirement Income Planning: No Cheat Code

By Franklin Mohri, CFP®

Imagine waking up every day to the retirement life you’ve always dreamed of; it may involve trying new hobbies like cooking or fishing or simply spending more time with family and friends. The financial security and personal fulfillment many wish for in retirement can come true, but it requires careful planning. There is no magical shortcut or cheat code to achieve this dream.

The behavioral recipe

Here’s the scoop: The secret to a more secure and successful retirement lies in balancing two behavioral mindsets; saving like a pessimist and investing like an optimist, a concept highlighted in Morgan Housel’s book, Same as Ever.

  • Pessimism for savings: Imagine the worst—losing your job or an unexpected maintenance issue with your car. This mindset is your ticket to disciplined savings habits, ensuring you’re ready for anything life throws at you.
  • Optimism for investing: Believe in the long-term opportunity of the market and the economy. This optimism helps you leap over the fear and hesitation that might otherwise keep you from investing.

Balancing caution and confidence is at the heart of successful financial planning, but it isn’t complete without one additional ingredient; living within your means, cutting back on splurges, and making thoughtful decisions about discretionary spending.

When applying the behavioral recipe, stay grounded. A common mistake is assuming that current circumstances—income, health, and lifestyle—will remain constant. This best-case scenario thinking ignores life’s realities.

A good retirement plan accounts for uncertainties by preparing for the unexpected, such as inflation risk, market fluctuations, job loss, and personal health changes.

Numbers don’t lie

Future retirees often dream of traveling the world to exotic locations. However, it’s crucial to translate these dreams into financial terms to understand what it takes to achieve them.

Take the real-life case of a 40-year-old dentist client who is planning on retiring at 65. His current living expenses are about $50,000/month, which would mean he will need about $12 million in retirement assets by the time he is 65 in order to maintain the same lifestyle, counting for inflation and taxes.  This reality check was made possible using a retirement calculator, which revealed that his retirement dream was unrealistic based on his current savings rate. The numbers don’t lie.

Financial professionals also use sensitivity analysis—a method of stress-testing the financial plan against different scenarios, such as market downturns, changes in inflation, or earlier-than-expected retirement. This helps ensure your plan is robust enough to handle a range of possibilities.

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In another recent discussion with a client approaching retirement, we examined several potential paths forward and determined that the client would be better off postponing retirement beyond age 70. This recommendation came after crunching the numbers and considering the client’s current conservative investment approach—lower risk tolerance and, consequently, lower returns. To retire sooner, the client would need to assume greater risk, which could increase the chance of financial loss. Additionally, we assessed how lifetime annuities might affect the client’s income sources.

Another financial planning tool, the Monte Carlo simulation, provides probabilities of investment success based on historical market data. It helps gauge whether an individual is on the right path to retirement.

However, Monte Carlo simulations are based on statistical data, and reality can differ due to the sequence of returns. For example, during the 2008 market crash, individuals nearing retirement may have had to delay their plans by several years.(1) Early negative returns can severely impact retirement savings.

To help mitigate market risk, it’s advisable to reallocate investments about five years before retirement. Future retirees should begin planning their retirement income strategy five to ten years before retirement. There are a variety of strategies financial professionals can leverage that help reduce the possible sequence of return risk in the first few critical years of retirement.

Important rules

Every individual’s financial situation is unique—after all, personal finance is personal—but there are a few important rules to follow on the retirement planning journey:

  • Pay yourself first: Set aside a portion of your income for savings before spending on anything else. A rule of thumb is to aim for 20% if possible but adjust based on your income level and circumstances.(2)
  • Diversify investments: Avoid putting all your money in one asset class, such as stocks, real estate, or bonds. A balanced portfolio helps reduce risk and increases flexibility.
  • Start early: The earlier you begin saving for retirement, its likely you’ll need to set aside a lower amount each month due to the power of compound interest.
  • Don’t act on emotion: Avoid making financial decisions based on strong feelings like fear or greed, especially when investing.

To save or to enjoy life?

Balancing the need to save for the future with the desire to enjoy life today is one of the most challenging aspects of retirement planning. But, guess what: it’s possible to save and enjoy life. Some financial professionals advocate extreme frugality, but moderation can be a more sustainable method. Follow these guidelines for your ‘cheat code:’

  • Set priorities: Allocate money for meaningful experiences while maintaining a consistent savings plan.
  • Adjust based on life stage: Younger clients often start out with basic life-stage assets like savings accounts, while juggling student loans and saving up for their first homes. On the flip side, older clients (50 and above), who are usually in the stage of refining what they already have, tend to concentrate on optimizing their investment portfolios and paying off their homes while keeping an eye on enhancing savings as they inch closer to retirement.
  • Revisit the plan regularly: Life circumstances and financial markets change, so your plan should evolve with them.

Bottom line: The path to success is not about shortcuts

Retirement income planning may not have a cheat code, but it does have a clear recipe for success. Saving with discipline is critical. Diversifying investments and preparing for uncertainties are equally essential. Remember, the best financial plan is one that balances caution with optimism and allows you to spend based on your values and goals while living within your means.

Find a financial professional near you.

 


About Franklin Mohri, CFP® 

Mohri is a Certified Financial Planner™ practitioner with more than 25 years of experience in investment and retirement planning. He focuses on clients of all types, including those in their thirties and forties in the accumulation phase and those over the age of 50 who are nearing retirement.


 
Footnotes:

  1. Investopedia, 10 Years Later: How the Financial Crisis Affected Older Adults, February 2024
  2. Investopedia, The 50/30/20 Budget Rule Explained With Examples, Aug 2024

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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