Planning for finances in retirement
By Tom Jager
My wife, Margaret, retired from her work as a teacher one year ago, and I am planning on retiring from my position at Calvin at the end of the 2010-2011 academic year. Participation in this reading group has given me a chance to reflect on how my wife and I have prepared for our retirement years, what principles we followed and how successful we have been in meeting our goals.
Financial Planning Principles
Our challenge was to accumulate sufficient resources during our years of employment to provide for ourselves financially during what could be 20 or more years of retirement. Our goal was not to be rich in retirement, but to be able to meet our needs, while continuing to provide financial support for a variety of Christian causes. We recognized that our obligation to provide support to the Christian community does not stop when our employment does.
Calvin’s retirement program is a defined contribution plan, not a defined benefit plan, so investment decisions and the accompanying risks were ours. The most important principles we followed were: Plan ahead, be aware of the risks involved in various investment options and think about what could go wrong.
Following the first principle of planning ahead, I began making additional contributions to my retirement account through payroll deductions from the very beginning. Saving was a part of our general budget, and the advantage of saving though payroll deductions was that what we didn’t see in our checking account we didn’t miss. Through the years, we were able to estimate our projected income at retirement and monitor whether we were on track to meet our goals.
Our next challenge was to educate ourselves about the risks involved with the various investment options in the retirement program. These options included a broad-based stock fund, more narrowly focused stock funds, bond funds, a real estate fund and a “guaranteed” fixed-income fund. Each option carried its own kind of risk. The historical average returns can vary significantly from one option to another, and the volatility of the fund values also vary significantly. One could select as the primary option the fund with the (historically) highest average return, but this generally carries the risk that the fund value can drop significantly, as well as increase significantly. Alternatively, one could select the “guaranteed” fixed-income option as the primary one. In this case, while the average return over a long period is less, the value of the fund doesn’t go down. But this option carried its own kind of risk. In periods of high inflation, the rate of return can be less than the rate of inflation so that the real rate of return is negative. During my first 20 years of employment, we experienced a prolonged period of stagnant stock prices and a prolonged period of high inflation. (I have kept a copy of a bank certificate of deposit paying 13.5 percent interest as a souvenir of the latter.) Those experiences reminded me that risk cannot be avoided and that it is important to understand what the risks are for various options. Since our goal for retirement was more to avoid poverty than to gain riches, we chose a mixture of options that was more risk averse and conservative than most financial advisors were recommending. Over the years, our allocations have changed somewhat as our circumstances have changed.
Finally, we found it useful to think about what could go wrong. The current world financial problems are in part, I think, a result of what can happen when people don’t think about what can go wrong. In our own case, the realization that things can go wrong led us to “over prepare” financially for our retirement years. Rather than aim for the bare minimum needed to meet our goals under ideal circumstances, we aimed to overshoot our expected needs. This increased the likelihood that our financial needs would be met even if things went (somewhat) wrong, and, if nothing did go wrong, we knew we could certainly find good causes to which to apply the extra resources.
How successful have we been? Fortunately, we have not experienced serious health, employment or other problems that could have significantly depleted our financial assets. Of course, not every investment decision that we made has turned out the way that we hoped. But because we had planned ahead, had diversified investments and were willing to make adjustments to our investment strategy, these “failures” have not prevented us from reaching our goal. Even with the current world financial difficulties, it appears that our goal will be met. Of course, 20 years of retirement is a long time, and when we look back at what has happened during the last 20 years, it seems clear that the next 20 will produce surprises that could have significant positive or negative consequences for our finances. We continue to hope that our financial planning has been robust enough for us to cope with such events.
Questions for reflection:
- What are your retirement planning/saving goals, and how are you proposing to meet those goals?
- Are your financial plans for retirement robust enough to withstand unanticipated events along the way?
- What are you doing to monitor the progress you are making toward achieving your goals?
—Tom Jager, Class of 1966, Professor of Mathematics, Calvin College