Unpredictability and Retirement Planning

February 12, 2016
Jeff Brown, MD

We like to talk about retirement planning as if it were a clear process with easily predicted outcomes. The truth is, millions of Americans find their expectations about when they will retire and how much money they will have were way off the mark.

“Man plans and God laughs,” goes the old saw. We know that about half of all retirements are unplanned, which sometimes means early timing and unforeseen circumstances. A few are early due to an uncommon windfall, such as an inheritance, IPO, or the lottery, but most early retirements are the result of life’s Great Wildcard, health. For this real risk we have insurances, life and disability, to protect our families and lifestyles.

Most unplanned retirements are later than planned. Some continue working; docs particularly love what we do. Much more common is the harsh reality of financial inability to comfortably retire. To look for cause, we have a minefield of reasons to pick our way through. Starting with inadequate planning. That includes “none,” infrequent review to keep up, and the real Gordian knot, false assumptions.

The past is all that we have to go on, but that is a poor basis to guess inflation rates, rates of return on various kinds of investments, savings rates, future tax rates, and so on. The pros are not good at this area either, but most acknowledge it and thus the call for at least annual review of our retirement planning to recalibrate on the fly.

The second most important area of retirement financial shortfalls is the lack of an adequate saving rate. Many docs are surprised at how much is required to be put away, especially early on in their careers when they can least afford it, to be able to maintain their lifestyle when they stop working for an income. So comes the universal advice to “Pay yourself first,” saving preferably automatically, and preferably into a tax-advantaged vehicle every month.

The third important cause of a financial shortfall when retirement dates start coming to mind is foolish investing. Unfortunately, this is a wide area, including, but not limited to, frequent trading, options, commodities, high fees, bad advice or “tips,” and undiversified investments. I wish I could ignore such obvious craziness as gold mines in Costa Rica, windmills (Don Quixote anyone?), and accumulating diamonds, but I know docs who actually invested in these things. We must always keep in mind the “If it’s too good to be true…” model.

If you have your health, the universal antidote for these financial peccadillos is simply to extend your working life a bit. Our social security check goes up considerably if you wait to 70 to collect it. Also, you will have more time to save and you will have more time to let the miracle of compound interest help you. On the back end you can afford to accumulate less, because you will have a shorter time to spend your seed corn if you work longer than planned. If you are in this position, do the math and you will be reassured.

The surprising truth we all face, even if we have been diligent in our planning and saving, is that whether and when we stop working voluntarily or involuntarily, the actual net worth bundle that we will rely upon will not be known until that actual date. And even then we have the issue of unforeseeable financial factors such as interest rates, market trends, and tax rates going forward. Still, we have to plan, be disciplined and stay the course. That kind of behavior is familiar to docs. So is “man plans and God laughs,” so stay on your toes. Entropy always wins.