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Are We at the Right Elevation?

Recently I was flying into a small airport in the Rockies. As we began the process of landing, it seemed as if we were significantly higher than we should be. The plane seemed to be slowing too fast and dropping too rapidly. However, I didn’t realize that the airport where we were landing was at a much higher elevation than I anticipated. It was essentially like landing on a shelf. I didn’t realize that the trajectory and speed were perfectly appropriate for our destination. As we landed safely on the ground, I was struck by the skill and confidence that the pilot displayed. Whereas I had looked at many external factors and had amateurish opinions, the pilot was able to rely on actual data to navigate to a successful landing. 


Last week I wrote about how expenses might best be calculated and how they will change throughout retirement. Our goal as planners is to accurately determine what a retiree’s expenses might look like in 5, 10, or even 20 years. However, we then need to establish a plan to pay for these expenses when they occur. Simply knowing that money is required is only one-half of the equation. We also must have a reliable plan to pay for those expenses when they are due and understand and mitigate any risks that might impair our ability to pay for them. 


This concept may seem unique to retirement, but it is not. For instance, during our working years, we anticipate that bills will arrive every month and that when those bills come, we will also receive a paycheck to help us pay for those expenses. We don’t usually panic when we think about needing to pay our mortgage for the next 12 months because we expect to receive 12 paychecks that will allow us to meet those future obligations. Of course, there might be a risk of losing our jobs, so many people create a safety net that will enable them to account for that risk. 


Last week I wrote about how retirees should evaluate their different categories of expenses. We explored how people should think differently about their essential needs versus their discretionary spending. I also wrote about how our consumption of various goods will most likely change as we age. One helpful way to think about this is to imagine each future year of retirement expenses as a unique bucket that must be filled. 


We know from last week that the components of the buckets may change over time. Let’s imagine that our expenses are represented by lines that show how far we have filled the bucket. For example, if in the first year of retirement you need $100, that would be represented by the entire bucket. However, that $100 might be $80 for essential expenses and $20 for discretionary expenditures. The fifth year of retirement might look similar. However, in year 20, we find that the size of the bucket has doubled (inflation), and we now need to fill a $200 bucket. However, 20% of the expenses in this bucket may not be discretionary. Instead, most retirees find that the expenses they need to cover at the end of their lives are more essential and less discretionary. So, in year 20, that $200 of expenses might include $190 of essential expenses and only $10 of discretionary expenses. 


The crucial role of a financial advisor in retirement is to have a strategy in place for each bucket of future expenses. The plan should cover essential expenses in years one, five, or 20. So, a retiree may plan on paying for their retirement in the early years out of their investments. It may seem simple to withdraw what you need to pay for year one, but every withdrawal limits future options. Therefore, each annual distribution needs to be considered in light of how it may impact future withdrawals. The ultimate design of a retirement income plan is to create a stable income stream sufficient to cover essential expenses. This income stream should be less affected by market fluctuations, changes in tax codes, or life’s surprise expenses. Essentially, the goal is to develop a plan to cover future costs through various economic cycles, market conditions, and spending patterns. 


In the same way, my pilot knew the proper speed, elevation, and flap settings to land the plane, a sound financial plan will account for headwinds, tailwinds, and altitude. Even though I thought the plane was descending too quickly, we were precisely within the bounds of where we needed to be. For many people spending money in retirement can create anxiety. Watching balances come down can be like looking down at the ground and wondering if you will “make it.” Focusing instead on the realistic expenses you can cover should allow retirees to enjoy the journey. Enjoying your flight and retirement might mean spending time with the right team and developing a plan to help you achieve your goals. 



Michael French

Author: Michael French, Senior Vice President of Investments

The purpose of the communication is to illustrate how accepted financial and estate planning principles may improve your current situation. The term “plan” or “planning,” when used within this report, does not imply that a recommendation has been made to implement one or more financial plans or make a particular investment. You should use this communication to help you focus on the factors that are most important to you. This communication does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation.

This communication may include forward looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could’” or the negative of such terms or other variations on such terms or comparable terminology. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially.