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Financial Tip

Financial Tip
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Downsizing: The New "Quality of Life" Retirement Strategy

Downsizing: The New "Quality of Life" Retirement Strategy

This isn’t your grandfather’s retirement anymore. Gone are the days of guaranteed pensions, and those ever-rising stock and housing markets that carried our parents and grandparents into an easy retirement have turned volatile and uncertain at best. As recently as the 1990’s life expectancy was around 76 years, but now, as it begins to stretch closer to age 90, the risk of longevity (living beyond your income) now compounds the risks of market volatility and inflation – none of which our grandparents really had to contend with. Retirement planning has become more important than ever, and, increasingly, the cornerstone of the “new retirement” plan is a lifestyle downsizing strategy. Why are more people downsizing their retirement and what exactly does that entail?

The Increasing Cost of Retirement

There use to be a time when you could apply a simple formula, such as 70% of your income, as a way to determine your retirement income needs. But that was before people started to live much longer. And, as longevity increases, so do many of the costs associated with retirement. For one, health costs are taking an ever increasing peace of the retirement income pie. The longer we live, the more health costs we will incur, and that includes the cost of long term care which at least one out of three retirees will require after the age of 75. Inflation is another “cost” that will impact future retirees much more than it did in the past. Retirees living until the age of 85 will see their living costs more than double assuming even a modest rate of inflation. Health costs always increase faster than the rate of inflation.

Lower Investment Expectations

The era of consistent double-digit investment returns is over. There were several times over the last several of decades that both the stock market and real estate market had long strings of 15 to 30 percent annual returns. It seemed as if the only direction the markets would go was up. Since 2001, that has changed, and most investment portfolios and 401ks have struggled under the weight of increased volatility and market bubbles. We still need to remain fully invested, with ample exposure in the stock and real estate markets, but the days of planning with 10% assumptions are over. People now need to use “worst case” assumptions to ensure they can reach their targets – a 6% return would be aggressive, and 4% return a more moderate planning assumption.

Downsizing: The other side of the planning equation

With future costs and investment returns becoming more uncertain, we can better control the outcome of our retirement planning by managing our lifestyle expectations. While a lot of age-related costs will increase, the cost of living in many other respects doesn’t have to, and, in fact, can be reduced significantly. Much of that has to do with how much you feel you have to rely on bigger houses or fancier cars. Will you be able to enjoy vacationing closer to home, or are trips to Europe an absolute must-have? Eating at nice restaurants is always a pleasure, but would you feel terribly deprived if you did it a few times less?

Why not start downsizing right now?

Most people work hard to create a comfortable lifestyle with the hopes of carrying it into their retirement years, and, frankly, there’s no reason why anyone should deprive themselves of the fruits of their labor. But lifestyle choices often translate directly into financial decisions that are likely to have long-term consequences. For instance, the choice of a 3000 square foot home when a 2500 square foot home would more than suffice could mean the difference of tens of thousands of dollars during retirement. Paying one or two hundred dollars more each month for a car for a better sound system or high tech safety features that will never be used could deprive you of some comforts during retirement. And, you have to ask yourself, “will this $150 dollar lobster dinner taste better now, or when I’m really trying to enjoy life?”

These don’t have to be lifestyle choices; rather, they should be “quality of life” choices for now and your future. Downsizing your life enables you to focus on getting more from it, which, when you begin early enough in your working years, will enable you to make the emotional and mental transition into retirement much more smoothly. Today’s retirement is not the mere footnote it once was, nor is it simply the next stage of life. For more retirees, retirement is a new start on life with educational and work or business opportunities they had only dreamed of. The new reality is that an increasing number of retirees just don’t have time for “lifestyle” because they’re too focused on their quality of life.


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