Saving During Retirement Could Mean A Much Greater Success Rate For Your Portfolio
I have my own misconceptions when it comes to retirement, such as that I no longer need to worry about spending and certainly don’t need to save any more. These 2 viewpoints can be slightly detrimental and I want to discuss why in this blog post.
Other concepts hold true and are sustainable, such as focusing less on work and appreciating free time while remaining productive, in retirement. Also, trying to direct my attention and efforts more externally than internally.
Save When The Economy Is Doing Well
The retired individual who can spend with flexibility can make it through all sorts of economic scenarios. Imagine for a moment being a financial adviser, let’s take Andrew (my adviser) for example, his job is to make sure that whatever retirement plan he come up with sustains his client’s household through old age, unexpected expenses, and market fluctuations – not easy because the CFP degree doesn’t come with a crystal ball.
The concept of spending flexibility is powerful not just for budgeting physician household aiming to become financially independent but even more powerful when that household starts becoming a ‘fixed income’ household.
Currently, in 2017, the securities market made up of mostly stocks and bonds is doing quite well. I imagine a retired physician couple living off of their investments is getting 10%+ returns for the year. Combined with social security income and possibly a pension, that’s a whole lot of dough coming in.
One option is to take the extra money and spend it – splurge on a vacation or a major renovation for the home. Alternatively, the extra income can go right back into savings – not necessarily investments, unless that couple has 30+ years left in their retirement years – but perhaps in a buffer fund.
This extra income from the various retirement sources could be stashed in a savings account or possibly invested back into their portfolio. Having a buffer is incredibly helpful as I’ll demonstrate in the next few paragraphs.
Spend When The Returns Are ShittY
The great thing about being retired is that you no longer have to worry about tough economic times. Hopefully with the help of your financial adviser you have planned well ahead, constructed multiple income streams and built portfolios which can keep you afloat and comfortable through turbulent times.
Transport yourself back to the first few months in 2008 when the economy reacted to the housing market crash. Your equities portfolio of $2,000,000 likely went down by 55% from 3/2008-3/2009 where it hit its bottom at $1,100,000. It took another year for it to get back to just under $2,000,000.
So, for a little over a year you got <50% of your usual income from that portfolio. If you buy into my spending flexibility theory then you knew that the market was going to eventually recover and that if you could just hold off on any major expenses then you would ride this downturn out.
The retired physician household can, therefore, comfortably spend from the dividend returns from their portfolio and dip into any buffer account they accumulated over the years, as needed. Because of their ability to flex their spending, they didn’t have to sell any of their funds in their mutual fund portfolio and still had enough to live a comfortable life.
If You Are Set On A Specific Spending Year-After-Year
Andrew and I have had many discussions regarding what I anticipate my spending habit will be once I solely depend on the income from my investment portfolio. Him and I had this discussion very early on and he asked very important questions in order to determine how stable my portfolio needed to be.
If the portfolio has to be designed in such a way that it’s more stable then the returns have to often be sacrificed. And by the time the financial adviser accounts for economic downturns and inflation, the portfolio has to also be quite large.
Note, the opposite of stable isn’t unstable, in personal finance speak, it’s fluctuating. A portfolio that varies up and down with economic trends is anything but unstable.
What this means for the would-be retiree is that they have to work that much longer, save that much more and invest in investments which may not offer the optimum returns, in order to avoid the normal and healthy fluctuations of the economy. I don’t know about you, but I’d rather save just enough and aim for the sexiest returns possible – taking only necessary risk, of course.
Andrew knows that I comprehend and accept this concept which gives me massive peace of mind. That’s how my portfolio is constructed – enough to offer me a comfortable retirement without needing for me to work/save extra years.
Saving For The Early Retiree
Some retirees, such as myself, are not only enjoying the shit out of their retirement but are also generating some income. So far my adviser hasn’t urged me to invest any of my extra money during retirement but I’m sure it benefits the both of us for me to do so.
It’s easy to lose track of budgeting when there is a lot of money to play with. I am having nearly $7,000 coming in every month, it would be a shame to not do something more exciting with this money than just spending it on food and alcohol.
The early retiree physician will have a ton of income-earning opportunities as I’ve discussed in previous posts, it’s the law of economics – you are the supply and when you drop out of the rat race the demand for you goes up which means a higher reimbursement for your time.
In my incredibly short stint in retirement I have more than doubled my hourly income, I have been offered a CMO job at a non-profit, I have been offered to be a partner at a medi-spa, and a few other fantastic opportunities.
Investing In Myself And Others
We don’t always know what the future holds and I am more of an intuitive person than a methodical planner. I may one day want to own my own massive urgent care or become a CEO of an exciting health startup. Or I may want to move to Philippines and surf the waves there every morning or spend my remaining days in a library.
I can’t let the opportunity of my income go to waste, even if I don’t have a pressing need for it. I already know I have the skill of spending flexibility. I can spend <$1,000/month and still live a more luxurious lifestyle than a King enjoyed a century ago. Why not add the other layer to my portfolio and build in a little redundancy. I haven’t yet mobilized my investments in order to live off of them, thanks to my income. But should the day come that I need to spend from my portfolio, I’ll have more than I need.
The more stability I have built into my portfolio, the more comfortable I can be to spend on friends, family, community and worthwhile global causes. There certainly will come a point when even my financial adviser will scratch his head and ask me why I keep putting more into my investments and how come I don’t do something else with that money.