Getting the Big Things Right in Retirement Planning

Retirement can be one of the most rewarding times in life. A lifetime of hard work has paid off—or at least a decade for you early retirees out there—and you now have more time to pursue your hobbies, see the world, and spend time with family.

Planning for retirement, though, can seem like a daunting task with so many questions to answer.

How much money can I spend without running out and leaving nothing for my heirs and charities?
Am I investing correctly?
When will I take social security?
Where will I live?
Will I downsize my home?
How will I spend the rest of my time after I realize I can only play so much golf and read so many mystery novels?
Will I work part-time? Volunteer?

Where do you start?

I am one of those oddballs who began thinking about these questions in my early twenties. I love thinking and planning about the future. This allowed me to make some of those exciting life changes at 38 rather than waiting for my “golden years”, and I want to help you get the big things right in your life as well. In fact, that was my answer to how I want to spend my extra time these days.

Let’s look at the Big 3 questions that you need to get right for a great retirement. Get these right for yourself (and don’t forget your spouse!) and the rest of retired life will work itself out.

1 How will I spend my time in retirement?

I intentionally made this the first question that you should answer when planning your retirement. You will be lost without knowing how you will spend your time. Your answer to this question drives your answer to the next two.

You may be thinking, “That’s easy. I’ll sleep more, do some things around the house, spend more time with my spouse, and [insert favorite hobby here]. Done.” Not so fast.

For a fulfilling and happy retirement, you need to make sure that your time is spread across each of the following categories:

Fun
Relationships
Exercise
Learning
Work

A single activity can span multiple categories, such as playing a new sport with a partner (fun, relationship, exercise, and learning). The important thing here is to spend enough time in each category so that one of them is not being neglected and you are living a well-rounded life.

1.1 Fun

This is probably the category that comes to mind when you think about what you will do when you have the time on your hands. You may have a hobby that you want to practice more, a longing to travel more, or a desire to see more concerts, plays, and sporting events.

Take some time to write out all of the fun things that you will do when you finally have control you’re your calendar and can free up days and weeks at a time.

If you can easily come up with at least 5 activities and hobbies that you love, you will have plenty of fun in retirement.

If you are struggling to come up with anything, think back to what you enjoyed doing as a child. Building model trains? Putting together puzzles? Painting with watercolor? Chances are you would love to rekindle some of those interests.

If you find yourself writing “activities” of laziness such as watch TV, sleep, sit on the beach, and lay in a hammock all day, you may just be burnt out in life. But you also may need to develop some more active hobbies and interests to ensure your happiness in your next phase of life.

Here’s my quick list for fun in my mountain town in Colorado:

Running
Biking
Hiking
Paddle Boarding
Snowboarding
Cross-country skiing
Sledding
Snowshoeing
River tubing
Frisbee golf

1.2 Relationships

What will you do to spend time with friends and family? Will you be a part of a faith community, club, or civic organization where deep relationships are built and you feel a sense of belonging?

If you move to a new location, this will be more important and challenging. If you are staying put, though, you need to consider whether your current social circles will remain when you retire. Many people find that most of their social connections revolved around their job, and those friendships quickly deteriorate when you no longer have that common tie.

My top priority for moving to a new town—where we had vacationed for many years but did not have community ties or family—has been to find a home church and meet locals. I have already met a bunch of great people by visiting churches and attending local festivals, trail races, and a weekly volleyball game. My wife has joined a gardening club and we plan to join the cross-country ski club in the winter. The people we meet here will be what makes it worth staying.

1.3 Exercise

You might have observed that all of my “fun” activities involve exercise. I have cherished the ability to get outdoors and move more often after leaving behind computer-centric 10 hour work days.

Some people don’t enjoy exercise quite as much, and would rather be shot by a taser gun than spend a day climbing a mountain.

I don’t know whether you have a love or hate relationship with fitness, and I won’t judge you for it either way. But I know for sure that an active person lives a more quality life in their later years.

There is a concept called healthspan that can be defined as the period of life spent in good health, free from the chronic diseases and disabilities of aging. As human lifespan has increased, with an average life expectancy of 73.2 years, healthspan, which lasts an average of just 64 years, has come into focus.^[1]

Exercise fends off many forms of chronic disease, and is the best known method for increasing healthspan.^[2]

Your exercise regimen doesn’t have to be extreme in order to produce benefits. The key is to stay active. Play your favorite sport. Do yard work or gardening. Go on a walk after dinner. Play with your grandchild at the playground. Do something fun outside in the sunshine! ^[3],[4],[5]

Plan for an active life.

1.4 Learning

Life is much more interesting when you are learning new things.

I don’t care how old you are or if you think you have learned everything you need to know in this life. There is always more to learn, and your brain will thank you for it as you build new neural connections and improve cognition. This, along with physical activity, a strong social network, and other healthy behaviors, may greatly improve your brain function as you age.^[6]

Read books, listen to podcasts, or pick up a new board game. Research and travel to a new city, mapping the streets and learning about the cuisine of a new culture. Learn how to cook. Learn how to sail. Then find someone to share it with, and it will lock into long-term memory.

Be a lifelong learner.

1.5 Work

Yes, I said work in the same context as retirement. Every human needs some form of meaningful work in their life. This doesn’t mean you need to keep working for pay. Volunteerism counts too. So does caring for a grandchild or aging parent.

Many great works of art and literature have been created late in life, including masterpieces by Matisse, Goya, and Cézanne and books by Laura Ingles Wilder (Little House in the Big Woods, later popularized as Little House on the Prairie) and Bram Stoker (Dracula).^[7]^,[8],[9]

What do you want to accomplish after you retire? It only needs to be meaningful to you. Maybe you want to build a bookshelf or an off-grid cabin, help your favorite non-profit achieve its charter, or write a series of children’s stories to pass on to your grandchildren.

Life Is Short. Do Stuff that Matters. –Siqi Chen

Plan to work on something you will be proud of. For me, it starts with the creation of Pathway to FI, and I plan to write books based on my work here. If I continue to enjoy the process, and have support from readers like you, I could be doing this for several decades.

2 Where will I live in retirement?

Picture of a globe, representing planning for where you will live in retirement

Now that you know what you want to do with your time, you can decide where to do it.

You may already know that you’re happy in your current home and couldn’t imagine a better place to live out the next phase. That’s great! Move on to the next section of retirement planning. If this doesn’t describe you, read on.

During your working life, where you live may be determined by the company you work for or the industry you are working in. It may also be heavily influenced by the location of parents or siblings, particularly if you have young children.

After retirement, you may find those restrictions to be gone. Your children have moved away. You are no longer tied down to a job location. You are ready to experience a new place.

Moving was one of the most difficult decisions I have ever made. I loved many things about Arizona, the neighborhood I had lived in for 15 years, and the social network we had built there. But I knew I wanted to be in the mountains and to explore more of the world in my next phase. Our family already owned a vacation home in a great small town in Colorado where we could picture raising our daughter without moving too much farther from grandparents. The adventure and new experiences of becoming Colorado residents won out in the end. I knew I wanted to try something unconventional in life, and leaving a great engineering career to move to the mountains and write about financial independence was it!

What characteristics make up the ideal location for you? There are big clues in how you plan to spend your time. A hiker like me needs to be near the mountains. A fisherman needs to be near the water. A foodie needs great restaurants. A grandma needs her grandchildren. Write down those criteria and make sure the location you select meets most, if not all, to your satisfaction.

Maybe you want to be nomadic for a while. Travel the world from one Airbnb to the next. Drive an RV around the country in search of your favorite place to settle down.

Once you have made a decision, it may be wise to rent for a year. If you have only experienced a weeklong summer vacation there, you may find that you don’t particularly enjoy the rainy season, the bug season, or the winter snowstorms. You may also find that all of your friends and activities are in the neighboring community.

There are alternatives to moving your year-round home as well. Should you become a “snowbird” and flock to a warmer climate in the winter? Could you have the best of both worlds by staying in the city, but having a weekend cabin at the lake?

The possibilities are endless, given the money to make them a reality. Only you can decide where your best life can be lived.

3 How much money do I need to retire?

This is the cornerstone financial question for retirement planning. I have spent countless hours researching, calculating, and thinking through the psychology involved in living off my own investments. I could write an entire book on this topic—which I may do some day—but will try to keep it brief here, and will break this down into a series of more detailed articles in the future.

There are rules of thumb and online calculators that will get you started. But you will have to answer a number of underlying questions, including the previous two—where to live and how to spend your time—in order to be fully confident about this one. You will also have to make a number of assumptions, and based on probabilities some of them will be incorrect and need revision.

That is why a retirement plan is a continual process. It is never “finished”, and will need to be revisited every year or so after retirement has begun.

Here are the three main elements that determine how large your investment portfolio needs to be before you can retire.

3.1 How much money do you need to support your desired lifestyle?

Where you live and what you do determine a majority of your annual spending. You can live in a high or low cost area and you can have high cost or low cost activities. I had neighbors in Arizona for a short time who previously lived in San Francisco and docked a sailboat there so they could go sailing with friends and party with them on the water outside the Giants’ stadium during baseball games. Their expenses were completely different when they sold their boat and moved to an inexpensive suburb of Tucson.

This is the part where reality comes into play. If your gut is telling you that your chosen retirement lifestyle is completely out of bed with what you can afford, you may have to go back to the drawing board on where you will live and what you will do in retirement. Otherwise you will be delaying your retirement date to allow your investments to grow further.

A good starting point for spending is to take a look at your current annual expenses and adjust from there. If everything about your retired life will change, you can start from scratch. But if you expect to live a similar lifestyle, this exercise will be helpful.

Which expenses will be similar post-retirement? Which will be different? Are there any categories that are missing completely?

Many people assume that their expenses will go down when they stop going to work 5 days a week. They won’t be eating out for lunch as often, commuting, or buying business clothes and accessories. This might be true if you are a high-priced lawyer who will no longer need to impress your clients with tailored Armani suits, a Rolex, and a Lamborghini.

If you are like me, an engineer who needed to dress professionally but was judged more by his approach to problem-solving than the 10-year-old Prius in the parking lot, you won’t have much to cut there. In fact, you are more likely to spend more since you now have to pay for gear and other fees for the hobbies you suddenly have time to pursue. For me, this looks like a stand-up paddle board, mountain bike, basketball hoop, camper, snowshoes, and lift tickets.

Make sure to remember the big items that may have been subsidized by your employer such as medical expenses or a company vehicle. Then add some conservatism since there could be plenty of unknown and unexpected costs down the road.

The last thing I will say on spending is that there is a potential misperception that expenses will only go up as you age and your medical bills increase.

According to a study by Fidelity, “an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”^[10] Healthcare costs are real and should not be overlooked. But there are opposing forces during this time as well.

People tend to play hard and travel more in their early retirement years, then slow down as time goes on, naturally decreasing their spending levels. Then they will see spending tick up again near end of life as medical bills take over. This phenomenon is called the retirement smile, which is what the curve resembles when plotting spending versus age.^[11]

If you believe your spending profile will look like the retirement smile, then planning to maintain the spending level of your early years should end up being conservative enough to calculate your financial independence number.

3.2 How much money do you want to leave to your heirs and charities?

You should leave your children enough so they can do anything, but not enough so they can do nothing. -Warren Buffet

This decision is very unique to each person and can be an emotional part of retirement planning. It involves the legacy you want to leave behind. It’s also a practical one because as they say, “you can’t take it with you when you die”.

Do you have children or grandchildren who you want to bless financially after you pass? Is there a charity that you wish to support?

My first suggestion in this case is to consider giving to those you love and support while you are still alive and able to see the benefits of those gifts. This can be one of the most satisfying experiences you will ever have, so why wait? As a bonus, if done properly, this can be done tax free as gifts to individuals and with a tax deduction to charities.

I don’t know a single person or organization that couldn’t use a gift today but would love to have it 30 years from now. In fact, if you live a long life your children could already be financially independent and retired by the time you are gone (it doesn’t hurt to dream!).

OK. You’ve considered giving now rather than waiting. The other practical consideration is that no one can plan to die with precisely zero. Again, this is where yearly adjustments can be made to your plan in your 80s, 90s, and 100s. It’s pointless to try to make this number exact when it is theoretically several decades away. A better line of questioning, then, is do you want to give anything away when you die? If so, you can plan to give away more, less, or an equivalent sum to your original net worth, and then make adjustments over time to make it happen. There are even strategies with life insurance (for another time and for fairly wealthy people or families) that can help you hit those goals with more precision as long as you don’t stop paying the premiums.

3.3 What withdrawal rate can your investments safely support without running out?

Safe Withdrawal Rate (SWR) is the percentage of savings that can be withdrawn each year of retirement—with annual inflation adjustments—without running out of money.

The 4% rule of thumb was created by Bill Bengen in 1994. It has been used by many as the holy grail of SWR, and is the basis for their claims to financial independence. Bengen himself is now revisiting his own creation based on new data that allows him to use more asset classes than his original 50/50 stock/bond portfolio. Amazingly, he is now claiming that SWR is higher than 4% if you include small cap value in your portfolio.^[12]

The Pathway to FI model portfolios incorporate large cap, small cap value, long-term bonds, and four other asset classes to create a high performing mix of investments that have historically exceeded what Bengen is proposing today by a wide margin. Read What Should My Asset Allocation Be for Building Wealth Versus Retirement for details on those portfolios.

Although the Summit and Descent Pathway to FI portfolios achieved greater than 6% SWR when looking back to 1970, I am taking a more cautious approach and considering how overvalued or undervalued companies are today based on a historical standard. I will present a specific method to do this in an upcoming article.

For now, we can start by assuming that your goal for heirs and charities is for your portfolio to maintain its inflation-adjusted value at a minimum. We will also assume that you plan to live a long, happy retirement that lasts more than 30 years. These goals require a withdrawal rate below the SWR, which is designed to ensure only that you do not run out of money over a 30-year retirement. We will call this new rate the Perpetual Withdrawal Rate, PWR.

It turns out that the Summit and Descent portfolios had a PWR of more than 5% when every starting point was considered since 1970. Within this time frame, there was a 10-year period with only 2.4% average returns for the Summit portfolio and 3.4% for the Descent portfolio, however. So if you stick with the long-term PWR, you still may have to endure an extended period where your investment returns do not keep up, and trust that there will be a stock market run in the future that causes them to recover.

Here is a seriously safe strategy:

Plan a starting withdrawal to match your portfolio’s worst-case 10-year return, adjusting annually with inflation. Then evaluate your portfolio over the first 5 years. If you are fortunate enough that the returns were high during these years and your portfolio has grown, then you can bump up your withdrawal rate to the worst 15-year return. Look at your portfolio again after another 5 years. If you have now survived the first 10 years with a good sequence of returns, then lock in the full PWR.

Worst 10 and 15 year returns and Perpetual Withdrawal Rate for several portfolios that could be used in your retirement planning — Table 1 – Worst 10 and 15 Year Returns and the PWR for Several Reference Portfolios and the Summit and Descent Portfolios, Data Courtesy of Portfolio Charts

As you can see in Table 1, this method only works for well-designed retirement portfolios such as the Descent or Golden Butterfly, which have nice positive returns over every 10-year period. The 60/40 and the Total Stock Market portfolios have had negative 10-year returns and do not satisfy the objective.

The downside of this strategy is that you may be over-saving. You may have been able to spend more in your early years of retirement. The upside is that you will sleep well at night and may end up with more money than you imagined after the first decade of retirement. Not a bad problem to have!

4 Summary

There are 3 big questions that you need to get right as a part of successful retirement planning:

How will I spend my time?
Where will I live?
How much money to do I need?

Your time should be spent having fun, building relationships, getting exercise, learning new things, and doing meaningful work.

Your home should be located in a place that enables the activities that you will love pursuing.

The amount of money you need is a function of the cost of your chosen lifestyle, how much money you want to leave to your heirs and charities, and the withdrawal rate that your investment portfolio is able to sustain.

Have you answered these questions for yourself? Are you confident that your plan allows you to live your best life in retirement?

Contact me with questions or if you need help designing your plan for a great retirement.

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