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Five Rules for a Successful Retirement

John Curry
Senior Director | CAPTRUST Marketing

Kareem Abdul-Jabbar knows a lot about retirement. A professional basketball hall of famer, he retired twenty-five years ago following a twenty-year career. Today, he’s just sixty-seven years old and, presumably, still has another couple decades in front of him. Perhaps it is the length of his post-career life that causes him to dislike the connotation-laden word retirement; he prefers to think of what he’s done as “transitioning from doing one thing to doing something else.”1 He has successfully transitioned from playing ball to being a coach, best-selling author, actor, and U.S. cultural ambassador — and, apparently, he loves it. We should all be so lucky. But it’s not chance that creates successful retirement outcomes. 

Whether you are just beginning to think seriously about retirement, expecting to retire in a few years, or have already started your transition, we offer you a few suggestions that may help put (or keep) you on the right path. 

RULE #1: Plan for Success

If you want to set yourself up for a successful retirement, create a plan. It need not be overly formal; that’s a matter of personal preference. However, your plan should be sufficiently detailed to serve two important purposes. First, it should answer practical questions about your retirement, including:

When can I retire? 

When should I apply for Social Security?

How much can I afford to spend in retirement? 

What kind of investment return do I need to safely fund my retirement? 

What is a reasonable estimate for healthcare costs during retirement?

Second, a plan acts as an anchor for expectations; the mere act of planning can lead to greater satisfaction. Ultimately, disappointment sets in when expectations are unmet. With realistic expectations in hand, you are simply less likely to be disappointed.

RULE #2: Expect the Unexpected

Another characteristic of a good plan is the ability to hold up under less-than-ideal circumstances. Make sure that you are comfortable and confident that your plan incorporates real-life uncertainties by preparing best case, worst case, and most likely scenarios. Doing so will provide a feel for the sensitivity of your plan to the surprises life may throw at you:

What if I am called upon to financially help a parent or a child?

• What happens if I live thirty or more years in retirement?

What if inflation is higher than I planned for?

Do I have enough cash on hand to fund emergency expenses?

The risks embedded in these questions represent possible shocks that could undo an otherwise sound plan. A plan that stands up to stress testing should provide you with confidence to stick with the savings program you have created rather than react to events out of fear or other negative emotions. 

RULE #3: Be Tax Smart

With rising marginal tax rates this year, it literally pays to be mindful of taxes. For pre-retirees, savings programs like 401(k)s, 403(b)s, individual retirement accounts (IRAs), and 529 college savings plans can help. They reduce the impact of taxes by allowing you to save money on a tax-favored basis, grow your money tax deferred, or withdraw accumulated assets tax free.

Often, investors pay unnecessary taxes and penalties because they are unfamiliar with the distribution rules for retirement plans and annuities. Beware, taking an early distribution from an IRA, an incorrectly named beneficiary, or failing to consider more tax-friendly distributions from an inherited IRA can create a surprise tax bill.

Another aspect of being tax smart concerns your investments. It’s not what you earn on your investments but what you keep that matters — especially in the wake of the American Taxpayer Relief Act of 2012. Several strategies to help manage the tax impact include distributing investments across taxable, tax-deferred, and tax-exempt accounts and managing the timing of gains and losses from one year to the next.

RULE #4: Dare to Be Dull

Because you will depend on it for a twenty- or thirty-year period of time, your investment strategy must strike a balance between upside potential and downside protection that you can live with. You must be able to both fund your retirement spending and stomach the volatility you are likely to experience from time to time. In the end, your retirement investments — the ones you depend on for regular income — are better off being boring.

Chasing market returns and trying to time the market are tactics that appeal to our animal spirits but generally end poorly. Year after year, findings by financial researcher DALBAR indicate that the average investor underperforms the broad market due to an inability to remain invested for “sufficiently long periods to derive the benefits of the investment markets.”2 By his own admission, even billionaire investor Warren Buffet hasn’t “the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”3

RULE #5: Revisit and Recalibrate

Retirement — if that’s what you choose to call it — isn’t a static period of life. As advisors, we find ourselves giving clients in their thirties, forties, and fifties consistent advice: Save as much as you can, maximize return given your level of acceptable risk, and stay in the market. While your asset allocation and equity exposure may change as you glide toward retirement, it is generally best not to overreact to life or world events.

In retirement, however, it is important to remain open to change. Once you have actually transitioned into retirement, you will want to ask yourself a few questions to help fine tune your retirement income plan: 

Did I accurately gauge my spending habits? 

Do I need all the income I’m receiving? Or do I need more? 

How is my portfolio performing relative to my return expectations?

Along the way you will experience life changes that will affect your income needs. Health, family, and financial changes are all possibilities. You may need to adjust or refine your plan based upon these inputs from the real world.

We hope these five rules for a successful retirement will help ease your transition from doing one thing to doing something else. Kareem Abdul-Jabbar, in a recent article, said, “I’ve experienced more adventures, accomplished more goals, and affected more people in a meaningful way than I did during my sweaty years of fame and glory and breaking records.”4 While following in his size-16 footsteps on the court is impossible, successfully transitioning into retirement — as he has — is an attainable goal given proper preparation and a sound plan. We welcome the opportunity to work with you to develop a plan to help you make the most out of your retirement. 

Sources:

1 Kareem Abdul-Jabbar, “Kareem Abdul-Jabbar’s Three Rules of Retirement,” The Rotarian, February 2014, http://therotarianmagazine.com/three-rules-of-retirement
2 DALBAR, Inc., “Quantitative Analysis of Investor Behavior,” 2013
3 James K. Glassman, “World of Investing: You can’t win if you aren’t in,” The New York Times, April 20, 2002, http://www.nytimes.com
4 Kareem Abdul-Jabbar, “Kareem Abdul-Jabbar’s Three Rules of Retirement,” The Rotarian, February 2014, http://therotarianmagazine.com/three-rules-of-retirement