Financial FAQs

Tough realities require rethinking retirement

By Scott Whytock

Each issue, this column will answer a frequently asked question regarding money and financial matters. Whytock is a Certified Financial Planner_®. He is the director of advisory services at Portland-based Aurora Financial Group, a Registered Investment Advisory. He, his wife and two young sons live in Scarborough.

Q: Earlier this year, I had planned on retiring by the time I hit 64, which is three years away for me. My husband would’ve retired the next year. Now, we look at our investments and we don’t see results that make us believe we can afford to retire anytime soon. We’ve probably lost about 20 percent of our 401(k) in the last 12 months. I had my heart set on retiring at 64. What do I do now?

A: There is no ideal response to this situation for many people in a similar situation. In general, the younger generation can absorb this with the passage of time, but those who are approaching retirement have some tough realities lying ahead. In your case, though, I find a few words that are raising a red flag. You stated that your investment returns don’t “make us believe” that retirement is in the near future. You also stated that you’ve “probably” lost a significant sum of money and that you “appeared” to be close to retiring. These words indicate that there was a lack of proper planning in calculating your ability to retire before the market went south. You need to have a base of information from which you can make an informed decision. By picking an arbitrary age of 64 at which you would retire, you may have found at a later age that you had made a colossal mistake. On the other side of the coin, you may have enough assets to comfortably retire now, even with 20 percent less money in your 401(k)s. The point is, you don’t know, and you owe it to yourself to understand where you stand.

You may not have taken an objective look at what retirement will cost. There is no easily applied rule of thumb that is appropriate. You need to sit down with your financial adviser and go through, in detail, your current income and expenses and create a cash flow statement. This will show you how each dollar that comes into the household is spent and will be the key document of reference for all future financial decisions. It will take much review work to ensure it is as refined as possible. From there, you and your adviser together should begin a discussion around future spending tendencies. This part of the process should entail a dynamic back and- forth conversation where the adviser learns more about your spending habits as a family, and you are able to benefit from the adviser’s experience.

You will try to put patterns to spending habits that do not appear to be regular in amounts or frequency. For example, you may discuss how often you see yourselves traveling and how much you might spend per trip, or you might discuss possible financial gifts to family members or charitable organizations. Collectively, this information, together with proper inflation and growth rates, as well as other adjustments, will allow the adviser to produce a clear idea of your retirement lifestyle, with the following caveat. This process results in a projection, not an absolute conclusion. Consider it a well-educated prediction of the future. It is a living document that should be reviewed and updated periodically, or as major life changes occur.

By going through this process, you’ll have the information that you need to adequately evaluate where you stand. You will have the facts that will assist you in making decisions about when to retire, as well as what will need to be done to reach your goals. Be prepared to spend a few hours with your adviser to have these discussions, as well as some time to do a little work on your own. The major market events that have unfolded have changed the game. This is a prime opportunity to begin anew, accept the grim realities that Wall Street has given us, and collect the facts that you need to arrive at an informed decision for yourself and your family.