Retirement planning and whole-of-life planning

Retirement www.wealthandrisk.nz www.fairhavenwealth.co.nz

What does retirement mean to you? What thoughts does it conjure? What feelings come to mind? What images appear in your head?

I've been asking myself these questions lately. Some thoughts are below. 

The term "retirement" itself might make it harder to think clearly

Labels can be useful. However, labels can sometimes hinder rather than help. My intuition is that this is the case when it comes to retirement. 

You don't need to think of retirement in binary terms

With many things in life, it's easy to think in binary terms. You're either this or that. Much of the time, it's more appropriate to think instead in terms of a spectrum.

For example, my wife and I could be working 60+ hour weeks. We would be "fully employed". However, neither of us work full-time in the traditional sense. We are somewhere in between being "fully employed" in the above sense, and being "retired" in the sense of not working at all.

My wife is in a high-paying professional and instead of maximising her income, she chooses to work two or three days most weeks. I'm self-employed and I work primarily from home. It's hard to say when work ends and work begins, so by some definitions, I work less than 37.5 hours, and by some definitions, I work far more than 37.5 hours.

My wife and I have a good sense of our financial situation and our trajectory. We're happy with where we're going. Instead of maximising our income, we are aiming for our version of quality of life, by working less hours and valuing flexibility.

We're not retired, but in a way we're at a different part of the spectrum compared to another professional couple who is otherwise in an identical situation but working huge hours. 

(Despite making this point, for simplicity I will refer to retirement in the binary sense throughot this article.)

I don't think I'll ever "retire", in the binary sense of the term

I want to die with my boots on. This isn't for financial reasons. It's because I enjoy what I do; I plan to continue doing what I enjoy; and I want to continue providing valuable services to people. 

My hours and commitments will go up and down. Maybe near the end of my life I won't have the energy to work, or health or other issues will get in the way. But the idea of retiring at a certain arbitrary age is anathema to me. 

This isn't the case with everyone. My wife is likely to stop working at some point. In which case, my aim is to work towards something that will complement our lifestyles when she is no longer working. I've got decades to work on that outcome. 

Some people are in roles that will wear them out, or where it will be difficult for them to find work in their golden years. This is something I address below under "career risk".  

Thinking about retirement planning from a financial perspective is myopic 

I recently spoke with an experienced accountant. He told me that he "semi-retired" several years ago (although "semi-retired" was really a euphemism for "fully retired"). He explained that the feeling associated with retiring was one of desolation. He has since gone back to work part-time.

People get a lot out of work. It's not just about money. 

Work provides social benefits. It provides structure to our days. It provides a sense of contribution. Work contributes to our identity. If you're fortunate, you enjoy it. 

Work is also central to our lives. Even if you're a work-to-live sort of person, it structures your life. It determines when you wake up. It determines when you eat. It determines what you wear. It can influence what you do in your free time, including the type of recreation you look for. 

Going from a situation of working to a situation of not-working at all can be like creating a vacuum in your life. 

Retirement planning is not just about planning from a financial perspective. You need to think about it from a broader perspective.

What are you going to spend your days doing? Do you have hobbies or interests that you'll pursue? Who are you going to spend time with? Can your relationship(s) sustain spending all of this extra time together - or can you anticipate a period of adjustment? What will be central to your identity once work stops being central to your life? 

There are many uncertainties associated with retirement planning

Uncertainty is at the heart of risk and opportunity. I'll focus more on the downside in this article.  

Career risk

Unless you're near the finishing line of your career, this is one of the big ones.  Retirement is often a euphemism for being displaced from the workplace.

This is a risk that needs to be acknowledged and managed. 

If you're young, you may have decades to plan for this. If you're approaching retirement, then you probably have options available to you. It's something worth thinking about directly. 

If you restrict your value to one set of skills that benefits only one type of client, this can lead to trouble. From my own perspective, it's why I've tried to go deep and wide in relation to my skill sets - I have a legal background; a financial advice background; a risk and compliance background; a training background; and a background as a trustee and director. 

Not only does this approach minimise risks, but it creates opportunities. It creates a unique "talent stack", as Scott Adams explains in How to Fail at Almost Everything and Still Win Big

Personally, it's also one of the reasons I've gone out on my own. If you work for another organisation, in a sense you only have one client. If you work on your own, you have many clients. There's potential for upside, but it can also help to manage risk by diversification.

Financial risks

I touch on these enough in this blog. But I'll summarise some of them briefly:

  • The risk of not saving enough. It's a truism that the higher your savings rate, the sooner you will be financially independent and/or in a position to retire. The less you spend, the more you save, and the less you need to save to support your standard of living. 
  • Not investing appropriately. There are two components to this. One is investing in a way that results in you losing a lot of your money - for example, by putting all of your eggs in one basket, and making investments that have a negatively skewed relationship between risk and reward. The other component is being too conservative with your investments. If you consistently leave 2% off the table for several decades, the final amount you'll have when you retire is going to be profoundly less than it could have been.  
  • Suffering a catastrophic event (for example, an illness or accident that means you are unable to work, or your partner dies unexpectedly) for which you are un(der)insured. I don't care about if the TV cracks up (extended warranties). But if I die unexpectedly, until I'm in a position to self-insure I want to ensure that my wife and children are taken care of financially. Life insurance is the tool for that particular risk.

Government policy risk

I'm tempted to categorise this as a type of financial risk, but it deserves its own section.

Governments change. Policies come and go. New Zealand currently has a very generous superannuation policy. Basically, anyone over 65 gets superannuation, regardless of their asset position or whether they are working.

New Zealand also provides for residential care subsidies for people who need them. It also has a fairly comprehensive public health system.

These policies make me proud to be a Kiwi. When I look after other countries - the US in particular - it makes me glad to live in New Zealand. It makes me feel more secure as an individual, and it's more in line with the sort of society I want to be a part of.

But these policies will change. My wife and I have already seen the superannuation age shift for us from 65 to 67. (I don't like to focus on it too much, but this single change reduced our expected lifetime income by $62,000 - ie, two years of superannuation for a couple.) 

It also seems a little absurd that the Government should be paying $31,000 per year to couples over the age of 65 who don't need it. One of the realities of spending - whether it's at the personal or Governmental level - is that we need to triage how to spend money, and allocate limited resources to where it is most needed. I wouldn't be surprised if superannuation becomes means tested, so this money can be put to arguably better use. In fact, I'd be surprised if this doesn't happen during my working life. 

It's also hard to predict what the public health system or residential care system will look like several decades in the future. 

(Admittedly, it can work both ways. For example, New Zealand could follow Australia's lead and start treating KiwiSaver in a tax-concessional fashion, turning it into an onshore tax haven that provides outsized benefits to the wealthy.) 

Longevity risk

How long will you live? Stats NZ's "How long will I live" calculator data tells me I can expect to live to 87.8 (assuming medium death rates). For a 37-year-old, that's another 50 years. However, it's important to point out that this is an average.

Half of people live longer than average. There's a 20% chance I'll leave beyond 91 (that's Sorted's take on the data). And that's assuming I'm an average person. 

I could live much longer than this. If I were to retire at age 65, I'd need to be preparing for at least another 22 years of life - perhaps more. 

I hope to be in a position where I can live off my passive income. However, the reality is that for most people, this isn't a possibility. (I don't think the mathematics would hold for everyone to be able to live off passive income.) If you're going to be spending your capital, you need to be acutely aware that there is a risk of outliving your funds. However, you also need to balance this with actually enjoying the fruits of your labour, and not living a more impoverished lifestyle than you otherwise need to live. 

Health risk

Semantics aside, no one chooses to get cancer or heart disease. The simple truth is that we don't know how our health will hold up as we age.

There may be a genetic component, and you can look at family members to get an idea of what you might be more vulnerable to. And we can make lifestyle decisions that make health issues more or less likely. 

But we really don't know what will happen to us. The only thing I can say with certainty is that age is usually the number one risk factor for most health issues.

Failing health can impact our retirement in many ways. When people say "your health is your wealth", it is to stress that when you don't have your health, not much else matters. 

From this perspective, a good retirement plan will include taking measures to increase the probability of having good health during your later years.

Failing health can also impact us socially. If you end up being well, and your partner needs to care for you, it will impact their life. It will also limit your ability to cultivate relationships. It is worth cultivating strong relationships with friends and family members during the course of your life, and not just waiting until retirement. 

And of course, bad health can impact you financially. If it happens during your working life, you'll end up with substantially less than you planned. If it happens after you've stopped working, your capital could fall a lot more dramatically than you'd like. Money is definitely a consideration when you need a hip replacement, and you need to balance waiting on the public health list for an undefined period of time versus paying $25,000 privately to get it done immediately. 

Instead of thinking in terms of "retirement planning", consider thinking in terms of "whole-of-life planning"

When I think about longevity risk and health risk, I'm reminded of the phrase "Eat, drink, and be merry, for tomorrow we die".

It doesn't help when I think about all of the things that could go wrong in the world, including nuclear powers being run by unstable people; climate change; the risks associated with artificial intelligence; designer pandemics; and the like. 

But we're here. And as long as we're here, it's valuable to plan for the future. My wife and I have done our fair share of planning, and we're currently reaping the rewards. 

We continue to plan for our future, and expect to continue being rewarded for doing so. 

We are planning for retirement. We're building equity in our home; we're accumulating financial assets; and we're also building career capital, which will enable us to manage career risk and generate income into the future. We are making the slow march towards financial independence.

But we are balancing the long future with today. Instead of working the 60+ hour weeks, we are enjoying our time today. We are making sure we have time to spend with our children while they are young. We aren't retired, but we are somewhere on the spectrum between being fully employed and not employed at all.

We are also building a framework that will enable us to enjoy our lives as we age. We invest in our relationships. We invest in our health. We invest in our hobbies, and having diverse interests. 

Sure, we are planning for the future. But we are also planning for today. Because retirement planning doesn't stand on its own. Retirement planning is only one part of a whole-of-life plan.

Some resources

There are a lot of good resources relating to retirement out there. Below is only a preliminary list.

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.