Covering both financial planning and personal fulfilment
For the new (or curious) reader, here is a link to Blog Post #200, which is an Index to the previous 199 posts, under the headings: Happiness and the Pyschology of Life Two; Investment; Longevity; Retirement Finance; and some other topics. I update the Index at the end of each year, so #200 is complete to the end of 2023. Each listing in the index includes the post number, a link to the full post, the blurb describing the contents of the post, and any takeaways. That should enable you to find exactly what you’re looking for. Now read on …
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Last time I covered my talk/interview with the Allan Gray group in South Africa: the topics I discussed, including characterizing adult life in three stages: Get Started, Get Serious and Enjoy (typically called retirement!), and the financial actions that are the minimum requirements for success in each stage.
I mentioned that Nshalati Hlungwane came up, after the session, with the best, deepest questions I have ever been asked, and I covered two of them in that blog post. Now I’ll cover her final four questions.
Question: In the Enjoy phase, you still have to think about your ongoing financial planning. How do you think about the post-retirement investment strategy and income generation approaches in the drawdown phase?
Again, great question, and I have a surprising answer, because I think you haven’t mentioned the greatest source of financial uncertainty in this stage, and it’s longevity uncertainty. I had to figure this out for myself, because nobody else had come to grips with it when I retired, now 14 years ago. There’s investment return uncertainty, and there’s longevity uncertainty: which is financially more serious? And when I did some calculations, I realized that, with standard US longevity tables, at age 60 longevity uncertainty gave rise to smaller financial consequences than being invested 100% in bonds – so, who cares? The two forms of uncertainty cross over (when they cross depends on which longevity table you use), but by age 75 longevity uncertainty has a bigger financial consequence than being invested 100% in equities. And that’s way too risky for the vast majority of people.
So, certainly before age 75 (maybe around age 65 to 70), if you’re still in good health, the best way to reduce your financial risk is not to worry about asset allocation, but to buy a deferred annuity kicking in at, let’s say, age 85, or, if that’s not available (and in most of the world it isn’t), an immediate lifetime annuity, big enough to cover the essentials of your lifestyle – then that big risk is taken care of, and you can use the rest of your assets for the “nice to have” aspects of your life, and that’s where asset allocation becomes how you express your risk tolerance.
And about that, let me add a simple perspective. Think of a lifetime income annuity as a bond portfolio, combined with longevity protection (an insight I got from interviewing Dr Moshe Milevsky). So when you’re thinking about overall asset allocation, if you have an annuity, you already have a chunk in bonds. That’s a point that’s often missed.
[See blog post #144 for much more on longevity risk versus investment risk.]
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Question: Assuming we have got things right in the three phases and we are lucky enough to be able to leave something behind for our heirs, how do you think about bequests and leaving a legacy?
You’re really covering everything, aren’t you!
I think financial bequests depend entirely on your personal family and social circumstances, so I have no general guidance. When I was planning for myself, I realized I could deal with bequests financially by deciding which of three approaches to use.
- The first approach is: I’ll leave whatever is left, after I’m gone. In that case, ignore bequests in financial planning.
- The second is: I’ll leave specific assets to specific people or causes. In that case, leave the capital value of those assets out of your own plans, or perhaps simply add back the annual income from them when you’re projecting your annual drawdown.
- The third is: I’ll leave a specific amount. In that case, buy a second-to-die life insurance policy for that amount, and the premiums become a part of your expenditures that your income has to cover. If there aren’t second-to-die policies available, estimate the premium and set aside and invest the premiums for the bequest.
And remember, also, that we don’t only leave a financial legacy, we also leave an emotional legacy, as I mentioned before.
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Question: Can you share any examples where people have successfully balanced financial planning with personal fulfilment in retirement that stand out to you?
Gosh – that’s a tough one. And yet … I suspect that most people achieve that balance without specifically thinking about it. Remember that this is the time of life when people say they’re the happiest – and that’s even for people who, financial commentators point out, haven’t saved nearly enough to preserve their work standard of living. I think that shows we’re very adaptable, and in the Enjoy stage we truly enjoy life.
If I had to think of a specific aspect that makes enjoyment so good, it would have to be being a grandparent – there’s no way to put a price on that joy, and as I said before, it’s all the greater because we have a second chance to enjoy being with young ones. In the case of my wife and me, we have no biological grandchildren, but there are three families where we’ve been adopted as pseudo-grandparents, and we simply love it. That’s personal fulfilment.
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Question: What role do social connections and being part of a community play in achieveing a happy retirement?
Another fundamental qestion. You’re very philosophical, aren’t you! And the answer is: a huge role. Bigger than the role of money.
Human beings are social creatures. Typically, in addition to our families, we’re actually members of several communities. Family and religious communities don’t change after retirement. Then first, we try to stay in touch with friends we used to work with. And then we volunteer. And we join groups, initially for the activities involved; but the fact is that we may join for the activity, but if we stay, we stay for the people.
And we need to do this, consciously, because if we don’t, the danger is loneliness. And that’s deadly, literally. Loneliness isn’t the same as being alone. Being alone is a physical condition, loneliness is a mental condition. We can live alone and not be lonely, because we’re in touch with people in other ways. And we can be among others and feel lonely – and, as I said, that’s deadly.
So, back to your question. Social connections are more important even than money.
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And that’s where we left things.
Nshalati reported to me after the conference that the attendees found the session extremely insightful, and that her colleagues will use the ideas to equip them for conversation with their clients, an excellent outcome for them. (And a big relief for me!)
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Takeaway
Thoughts on comparing longevity uncertainty with investment uncertainty, bequests and our emotional legacy, our adaptability in retirement, and the huge importnace of social connections.
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I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.