By Brad Thomason, CPA
November is national Long-Term Care Awareness Month. From time to time I have conversations with people who have a parent that needs care, and they are thinking about retiring early to be the caregiver.
Today’s post will be short, because I don’t need a lot of space to cover this one.
When a person is working, there are often five key things going on which contribute to a better financial position in retirement:
1. The current paychecks pay this year’s bills
2. Contributions to the 401(k) or similar continue to be funded
3. Employer matching contributions continue
4. The portfolio capital is left alone to compound for another year
5. The total number of years that the retirement savings will have to ultimately pay for is reduced by one year
When a person retires early, all five of these things stop.
Why the person retires does not matter, financially speaking. Whether you have a fantastic reason (like love for a family member) or no reason at all, the dollars are impacted the same.
When a person retires early they are essentially giving their retirement savings a bigger job to do (cover more years’ worth of bills), and demanding that it be done with fewer resources (due primarily to forfeited future investment returns). It’s tough to see how that could be a step in the right direction.
Please be careful if you are contemplating the DIY approach to helping a family member with a care situation. The costs are likely to be much larger than what they appear on the surface to be.
That’s true even before you get into the quality-of-life costs, by the way. Which are by no means insignificant, in their own right. Caring for another person can be demanding and stressful – so much so that it could negatively impact your own health.
Again, please be careful if you are facing this situation, and appreciate the fact that you are dealing with something that has the ability to do damage to your financial security, by hitting at many different aspects all at once. Being the primary caregiver is probably the wrong answer, even if at first look it appears to be the right one.
By Brad Thomason, CPA
One of obvious aspects of retirement planning is the fact that there’s often a wide degree of difference between the factors which bear upon one case, as compared to those which bear upon another.
What one family would ideally like to do is often very different than what another would like; and this difference exists even before we start getting into things like how much capital is available, where the capital is deployed, what kinds of returns it’s earning, the rate at which it will need to provide income, and so on. None of which is likely to be the same.
Yet in the face of all of these differences, there are also certain similarities. These similarities are not a large enough part of the picture that it becomes reasonable to argue for one-size-fits-all planning. But neither does it mean we are in a land where we have to start completely from scratch each time a new plan starts to come into being.
I think it would be fair to say that most of the work that we do in the field of retirement is based on the idea that understanding is the result of a process, and the process of understanding works best when there are frameworks available for organizing the various pieces of information which are important to the task. Having a place to cognitively put things helps to keep everything straight, and makes the information more useable.
The designers of aircraft, for instance, need to have a basic understanding of whether or not a particular feature is primarily there to create lifting force, or there to absorb the forces associated with returning to the runway, or whatever. Within the larger job of “make it fly,” there are sub-jobs which must act in concert to bring about the general success. Knowing where you are in the big picture, as you move around among the details, is the means by which true knowledge of the whole eventually emerges.
One of the early framework elements we settled on in our work was to make a hard distinction about the job the portfolio needs to do before a person retires, versus the job it needs to do after the person retires. When we point this out to people it gets almost immediate and universal acknowledgment as an important aspect of the landscape.
This, despite the fact that few other voices in the retirement planning discussion seem to be pointing it out very often, if at all.
Another of our framework efforts is in the delineation of the kinds of elements which make up retirement income. We don’t know of many other resources which take the time to go into these in depth. But once you’ve been through them, it is hard to see how a complete understanding of the requirements could have been achieved without having picked them apart.
The key to these frameworks lies in the similarities between cases, not the differences. It may be that one person has a resource base and future needs which differ greatly from what someone else is working with. But it will also be the case that no matter what those variables are, the situation is going to change in analogous ways once they stop working and turn to the portfolio to provide some or all of the monthly cash flow need.
People retire at different ages; though mostly those ages fall within a fairly narrow band of years.
People live to be different ages; but the outer reaches of life expectancy for all of us are pretty well defined (at least they are at this point in time…).
People buy a lot of the same stuff. Inflation affects everyone similarly. Health costs are likely to be a major category of non-budget items when dealing with groups of older persons. Et cetera.
These similarities provide us with the building blocks for creating the frameworks we use to try to help bring order to the planning process.
If you think about it, if we didn’t, then just about all of the questions one could ask about what to do in terms of retirement planning steps would have to be answered with some variant of the response, “Well, it depends…”
A person engaged in planning will eventually get to the point where the unique factors will take over the conversation. It’s just that those unique factors aren’t all there is to talk about, nor do they necessarily have to be talked about first.
So some degree of structure, based on similarities, is preferable. But we have to be careful not to go too far down the path. Though many do.
Unfortunately, there are any number of rules of thumb circulating in the conversation, rules of thumb which are attempts to short-cut what is unfortunately a not-so-simple thing. They seem to dream of a world in which the average retiree is the only we need to provide for.
In twenty five years of doing this stuff I’ve yet to meet the average retiree. If he/she exists, you can’t prove it by way of anything I’ve ever observed.
Rules of thumb usually fail in real-life examples for the simple reason that they are typically attempts to build sameness or framework out of the parts of the equation that actually are different. The effort of building framework should have stopped when the supply of similarities was depleted; but the constructors and advocates of many of the general dictums seem to have not let a little thing like being out of suitable materials get in the way of trying to build the sand castle to greater heights.
This of course flies in the face of that famous admonishment from Einstein, to make things as simple as possible, but not simpler. Frequently, it leads to exactly the outcome you would expect it to.
What all of this means, in the end, is that your retirement plan will need to be tailored for you. Your specifics will play out differently than what other people will experience. But you can nonetheless follow the same process of putting the plan together that others have followed. Because just as there are profound differences, there are also some basic similarities. If you use those similarities to create a sense of order, you will be in a much better place to contemplate and understand the range of possible outcomes offered by the remaining differences. Just be mindful of where the line between the two is, by among other things, being very careful about how willing you are to follow rules of thumb or follow the guidance of those who suggest that the task in front of you is a simple one.
Because it isn’t. But neither is it completely uncharted territory.
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