Nathan Abse interviews Fritz Gilbert—a longtime writer on retirement—about the psychological and financial considerations retirees say, in hindsight, helped shape good outcomes in their decisionmaking process.
Just when many fundamentals of the American economy had bounced back—along with with the easing of COVID-19’s negative effects, including sharp drops in hospitalizations and deaths—unfortunately now those nearing retirement must confront a financial universe rattled by war in Ukraine, continuing political strains at home and a strong upswing in inflation. Indeed, the current economic unease is bringing worries not felt for decades. Luckily for most feds, much of their retirement will be covered under CSRS or FERS programs which will strongly buttress their Thrift Savings Plan savings plus their own and in many cases their family's other investments and Social Security. But all buying power in retirement—whether COLA-fortified or saved up through the TSP and other investments—could be subject to inflation's diminishment and market volatility. This week Nathan Abse interviews Fritz Gilbert—author of Keys to Successful Retirement and a longtime writer on the popular Retirement Manifesto website—who explains his approach to preparing for retirement in these changing times, and how he and his followers weigh a wide range of factors in their planning late in this pandemic and the inflation that has followed.
Q&A Fritz Gilbert
First, when you talk to retirees, they often emphasize the psychological aspects—right?
Gilbert: Yes. And it’s important to look at these. Most people initially focus on the financial considerations when planning for retirement. But those same people often find that it’s the non-financial aspects that cause the most disruption as they transition into retirement. Remember: money is only one aspect of the value one gets from being active on a job.
So, how do you help people go beyond the money, to face those psychological aspects of retirement?
Gilbert: Well, in order to have a successful transition, I encourage people to think of the other things they get from their work—and to seek to develop areas to meet those needs in retirement. For example, you have to ask yourself, is your self-identity tied to your job title? When you retire and have the freedom to be whatever you want to be, what would you like to be known for, if anything? Here’s another important one beyond that: Relationships. How will you replace the friends and relationships you currently have in the workplace? What will give you a sense of purpose? Thinking through all of these non-financial areas which are currently filled up through your work—and considering how you'll satisfy those other aspects of your life. This is a critical area to consider as you prepare for retirement.
Turning to money issues: Would-be retirees now rightly worry about inflation, right?
Gilbert: Yes, of course. But you have to and can manage it. It’s important to have a realistic estimate of your spending post-retirement—it’s an absolutely fundamental part of the retirement equation. I encourage people to not just consider their spending in the first year of retirement, but to lay out a cash flow projection for at least 5 years, including a realistic inflation figure for each category. While working, your salary typically increased at a rate equal to or above inflation. Once you've retired, you'll most likely be on a fixed income—excluding Social Security and some government retirement accounts, which may be inflation-adjusted. Make sure the overall performance including the rest of your portfolio and your safe withdrawal rate will be sufficient to get you over the top, to cover your expected spending. I say this especially given the reality that today's higher inflation will likely increase your spending in the coming years.
Ironically, although inflation now outpaces low-performing funds, many are so spooked by inflation and market volatility that they stick to those—losing spending power, right?
Gilbert: That’s true. Look, that reaction can be partly right, as a way to go about things. It depends on where you are in your working life. So, the way I look at it is when you're moving from the accumulation phase to the withdrawal phase on your savings, that’s when there has to be a fundamental shift in the way you think about your investments. When you are accumulating, you should save as much as you can and be mindful of putting a good portion of that in aggressive growth stocks and investments. Why? Because you are working on getting to “your number,” your needed savings for your retirement. During this phase, if the market tanks in places along the way, it doesn't matter nearly as much as it will later—because you’re still working, still earning and still saving, right? Now, on the other hand as you near the withdrawal phase, now you should think of your money in a different way. And to be specific, in my view here you should be altering your investments—and make sure to think about having near to hand more than one year’s needs—you have got to protect three to five years of future spending.
Why do you counsel people to set aside that much—to be prepared for such a long stretch?
Gilbert: I think you should have that much, enough for your spending for the next three to five years. That much ought to be protected from the market forces. Meaning you want to have at least three to five years of funds in safer investments, because there’s a risk—specifically, it’s your “sequence of return risk” if the market drops, right?, that closes in when you retire. That is, that if you’re not prepared you might be forced to sell battered stocks suddenly after a big downturn—and you could really diminish your potential of having enough money to last your lifetime. To cut this risk you should have readily-available money in some kinds of safe liquid—you know, cash, CD, maybe short-term bonds, any of these types of investments. Now, when you look at the other part of your portfolio, you've got to think about the long-term inflation risk. So, this part of your portfolio can and needs to be different than that short-term part—it has to be in things that have had a historically proven track record of keeping up with and beating inflation. You see? You’ve really got to have a “two bucket” approach to your investments—to mitigate both the short-term risks of a market downturn and the long-term risks of inflation.
Most experts warn against overreacting to inflation, putting too much in bond funds—or TSP’s G Fund. Though “safe,” they don’t grow much and you’ll lose ground against 7% inflation, right?
Gilbert: The way I would answer that is you might think you're being safer by putting your money into cash and in less volatile investments—like the TSP G fund. But if you do too much of this, in reality, you’re actually increasing your risk. You’re cutting some of your risk exposure—but you’re also likely going to be totally blown out the door by the ongoing risk of long term inflation. Right? People sometimes think, somehow, “Oh, I'm being safe! I'm putting all my money in cash,” right? Well, no. You're pretty much guaranteed if you stick with things that don’t yield much that you won't be able to keep up with inflation. You’ll suffer a longer term decline in your quality of life, because you're not going to be able to spend as much as you do now—on an inflation-adjusted basis.
So what’s your prediction? Expert opinion varies, but in your opinion will high inflation persist?
Gilbert: I don't know. right? And that’s the point—there's no way that any of us can know. It’s an unknown, and it always will be. So, the only responsible approach you can take is to have a diversified portfolio. That way, whatever comes next, you have your eggs scattered across many baskets—and that way historically it’s likely more of your money will stay safe. That’s why, like many people in this field, I’m a big proponent of diversified asset allocation. Not just across stocks and cash, but also extending across some bonds and possibly some REITs. And these days you can distribute all of your risks easily, because there are lots of low-cost, readily available mutual-fund style investments across a variety of types of assets. Having a diversified portfolio is the only good way, because no one can know what's going to happen in the wider economy. So have some stocks, stock funds, and the like. Why? Because over time the stock market is proven to keep up with inflation. That way if inflation continues, your wide range of stocks should help. It’s my buffer against inflation risk. Again, no one knows the future, so you have to be conscious and allocate your investments across a broad portfolio.
Can you give us a quick synopsis of your retirement manifesto?
Gilbert: My "retirement manifesto" basically comes down to "helping people achieve a great retirement." In essence, I've found a fulfilling purpose in my retirement years by sharing the things I'm learning on my journey with others, in the hope that they can apply lessons I've learned to improve their own journey. (In my case, I discovered that I love to write, and I enjoy using my writing to help others find their way to living a fulfilling life in retirement.) The most important thing I've discovered is the need to find something to do with your time that brings personal fulfillment. For many people, that purpose can be discovered by helping others. So, search for a need in your area, and think about a way you can address some need. Think about it like this: Now that financial considerations are no longer the key driver on what you do with your time, what can you do that will help people in need? For me, it’s my writing and sharing retirement lessons with others. For my wife, it's running a non-profit that builds free dog fences for low-income people in need. Only you can discover what works for you. When you're nearing retirement, consider the needs of others as a starting point.
How can people who worked so much stay happy with their new free time?
Gilbert: First, I think it's important to realize that life is about a lot more than your job. While it's been a major focus of your life to this point, that all changes in retirement. I have many friends I've made in retirement, and it's interesting to realize that I know very little about what they did when they were working. It's also true that I seldom talk about my career, which was once a major focus in my life but is now essentially irrelevant. Once you're retired, your job is a thing of the past. Focus on the present and the future, not the past. Focus your time on finding things that you enjoy doing that can bring the same fulfillment you once received from work. You will go through a transition as you leave the workplace, and the most important thing you can do to ensure a smooth transition is to start thinking now about what you want your life to become after work.
Can you discuss more surprises in retirement, for example on personal and marital issues?
Gilbert: Sure. Well, it's counter-intuitive, but I've found that most retired people think less about money after retirement than they did while they were working! As I’ve written in my “90/10 Rule of Retirement” most people are 90% focused on the financials when they're trying to determine if they're able to retire. Once retired, however, their focus shifts to building and living the life they want, and that financial focus tends to diminish. That is to say, the major financial elements get determined by the decision on when to retire. People often find a way to live with what they have. And yet another counter-intuitive element is that folks who have been diligent life-long savers often have difficulty transitioning into becoming spenders in retirement. Many actually spend less than their safe withdrawal rate would support.
Are there any more post-retirement curve balls?
Gilbert: Personal space issues are a major element in the transition to retirement. Of course, many people have experienced some of this before they retire, in recent years—with the trend toward working from home. So, that’s likely to be less of a surprise for folks transitioning into retirement these days, I mean from a work-from-home job. Having said that, it is important for both partners to realize the impact that retirement will have on their personal space dynamics and include it in their discussions on what they'd both like life to be in their retirement years. I encourage people to pre-agree on what I call, all together, "He Time - She Time - We Time.” It’s about how much time each partner wants to be free to do things themselves vs. with their spouse. As your retirement evolves, take time out to have heart-to-heart discussions on how things are going and continue to experiment by making adjustments until the appropriate balance is achieved.
You’ve emphasized that in retirement many find a new “purpose.” Can you elaborate?
Gilbert: Yes. I think this is very important—and frequently overlooked. Most people realize in retirement the importance of discovering a purpose for this part—often a second half—of their life. This can be a big deal. I've interviewed many retirees in their 80's and the majority have stated the most important aspect of a successful retirement was to discover their purpose for their golden years. The importance of purpose is something most people overlook when they plan their retirements—but most later realize this is key, as their retirement evolves.
This article has been updated.
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