Trends in retirement



After you’ve been in the military for 8-10 years, you notice the pendulum swings. At first they can turn you into a bitter, hardened cynic, but after two or three limit-cycles you realize that the pendulum’s problem is slowly getting solved. Eventually you recognize that there will always be overshoots.  You adapt to the cycle and make it work for you.

After you’ve been reading about retirement for a decade, you start to notice the same pendulum swinging away. For Baby Boomers, the doom & gloom of the 1970s gave way to the 1980s bull market, only to be overwhelmed by the 1990s irrational exuberance. The end of that bull market may have quashed many fantasies of retiring to private islands in our 30s, but people realized that they had to work harder for their retirement instead of simply depending on the endless growth of tech stocks. That lesson was brutally driven home during the Great Recession, yet it ended up leaving many questioning whether they’d ever be able to retire.

In one of her books, personal-finance professor Deena Katz claims that we Boomers are “redesigning retirement” because we’ve finally recognized that we didn’t save enough. Boomers, instead of admitting “I screwed up, I don’t have enough to retire” are denying proclaiming “Retire? I don’t want to just rust on the porch swing. Rewire!” I think this pendulum swing will reach its limit when Boomers realize that working into your late 70s is only slightly better than “rusting”.

The real goal is financial independence: work when you want to for fulfillment, not because you need to for grocery money.

So let’s take a look at some of those retirement pendulum swings.

Nearly 20 years ago financial researchers suggested that a 4% withdrawal rate for 30 years was largely “safe”.  Thousands of other research papers have looked at all aspects of this broad generalization, and some of them have identified a few flaws.

For example, one of the latest research papers tries to figure out the best way to analyze the random distribution of investment returns. Their analysis looks at major mathematical distributions and determines that a truly “safe” withdrawal rate is 2.5%.

The problem with this research is that investment returns are still random. There’s no way to precisely and exactly turn them into a “distribution” that can be mathematically crunched. The only way to handle a series of random returns involves probabilities and statistics, which will always leave a small hole for a highly unusual “black swan” event. Most retirement calculators produce an “estimate” of a plan’s success, and they almost always have a small chance of failure. Not only that, but they assume your spending stays constant (or even rises for inflation).  Calculators don’t handle changes in behavior.

Other financial surveys (statistics, not math!) have concluded that retirement spending declines over time, especially as retirees reach their 80s. Medical costs start to rise (especially prescription costs) but the majority see a net drop in spending. End-of-life care is still a large cost for some that should be hedged by a form of long-term care insurance, but overall retiree spending does decline over time. Retirement calculators don’t handle this change in behavior.

Studies of investor behavioral psychology have concluded that our spending changes when the situation changes. When the stock market is great, we feel comfortable spending more money. When the stock market dives (especially during recessions) we cut back on our spending. Retirement calculators don’t handle this change in behavior.

A recent Wall Street Journal article concluded that some of our assumptions about saving for retirement may be flawed. If we expect a certain number of promotions and pay raises along with savings rates and investment returns, then we may be blindsided later by a “pay plateau” or even layoffs.

So how should we handle these alarming revelations of poor retirement planning?

Keep watching the pendulum swing, but worry constructively. The 4% withdrawal rate has handled thousands of peer reviews and other detailed analyses while remaining intact. Instead of attacking the core proposal or producing a “better” system, research has obsessed over the improbable worst-case scenarios. When you’re planning your own retirement, start with the 4% system and assume that you can make up for the inevitable surprises by temporarily reducing your spending or even working part-time. Military retirees will survive financial adversity largely on the strength of inflation-protected pensions and cheap healthcare. Military veterans (even without a federal pension or Tricare) have the discipline, diligence, and creativity to handle these life disruptions far better than most people.

The math has not changed. It’s still possible to save money and to invest in assets that will compound faster than inflation. It’s still possible to design a retirement budget and a portfolio withdrawal plan that will last the rest of your life. The keys are to make saving & investing a priority, to avoid excessive risk, and to be patient.

It turns out that your real retirement worries may not even be financial ones. For example, noted columnist Linda Stern reports on a rising trend of “gray divorce“.  Marriages are based on shared goals, communication, and negotiation. Retirement is essentially a new life with new goals, and if your marriage skills are rusty then retirement is going to expose all the weak spots. The “life” part of retirement planning needs to begin years before the transition seminars. Couples need an environment of mutual trust to talk about what’s important to them, and to figure out how they want to handle this significant change.

Even if you’re not married, retirement can be a huge challenge to your time-management skills. Experienced early retiree Sydney Lagier points out the dangers of overcommitment in a recent U.S. News & World Report article.  During your working years, retirement can seem like a vast unpopulated wasteland of free time. The reality is that retirement is both a more leisurely “stop and smell the flowers” routine as well as a new life of exploring new activities. If you’re not paying attention then your “leisurely” approach will blow up in a frenzy of hyperactivity.  Instead, you have to deal with the feelings of “retiree guilt” while also learning how to say “No thanks.” Before you take on a new activity or commitment, consider where it could lead– and consider your “exit strategy” as well.

I’m sad to say that Sydney has taken her analysis to its logical conclusion:  she’s been blogging on early retirement for nearly four years but feels that it’s time to take a break.  Instead of analyzing her retirement, she’s going to enjoy it for a while. I suppose it’s an exit strategy that all authors and bloggers need to confront!

Related articles:
Military retirement spending: how much will I need?
Military retirement: how much can I really spend?
USAA: seven money rules to break
Back to the Trinity Study
Saving base pay and promotion raises
Dealing with “retiree guilt”

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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  3. Reply
    JDARNELL July 25, 2011 at 1:40 AM

    I think the “income effect” is alive and well as it relates to how we spend. I must admit when I am flush with $$ I get lazy and just let things happen. When times are tighter I am far more efficient.

    As my family is going into early retirement the financial piece of the equation is almost non existent. Rather we are having to learn how the new daily routine (or lack of one) is impacting the family dynamic. I have not gotten the throttle tuned for a smooth transition but rather it is speed up or slow down. There is so much to do and so little time. The good thing is these are the things I want to do no longer have to do.

    So far no retirement guilt but I will let you know when it sets in.


  4. Reply
    Doug Nordman July 21, 2011 at 8:40 AM

    You’ve asked a great batch of questions!

    As I drafted the answers, it turned into an entire blog post which I’ll put up on Monday 25 July. The good news is that I’ll have time to polish it and add reference links. The not-so-good news is that it won’t be up until Monday.

    Until then I’d recommend plowing through some of the links at . It all started in 1998 with this research:

  5. Reply
    m.s. russo July 21, 2011 at 7:05 AM

    Explain again this 4% – is that 4% withdrawal from the “investment pot” each year in retirement? Wouldn’t that automatically reduce the amount withdrawn each year? And the 25 times living expenses…we might be unusual in that our children are both college age as we approach 65 so our current expenses might be much higher than other readers. So what is a reasonably robust guess?
    Calculators are only as good as the formula(s)/equations behind them – what is the BEST Formula anyone has determined to date?

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