For many Americans, retirement is a stressful topic. Surveys repeatedly show a large percentage of US households are nowhere close to accumulating enough assets to enjoy a comfortable retirement. Instead, they live with a series of nagging thoughts about the tenuous nature of their long-term financial future, wondering…
“Will I be able to work long enough to accumulate a comfortable retirement?”
“Will I ever have enough money to retire?”
“Will my money last as long as I live?”
How do Americans deal with this anxiety? Many of them make plans, often very elaborate plans, using historical models, computer algorithms, and risk-weighted projections. It’s very technical, sometimes very impressive–and usually inaccurate. This is because even the most sophisticated of these retirement projections are still educated guesses, based on assumptions. If just one assumption proves to be incorrect, the entire plan can unravel.
The shortcomings in this type of retirement planning don’t mean all planning is futile. But American households might find greater benefit from a different approach, one that offers not only the prospect of positive results, but also some emotional tranquility along the way. It’s not a calculation-driven process, but a classic bit of wisdom that has permeated American culture.
Grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And the wisdom to know the difference.
The three lines above are commonly referred to as the “Serenity Prayer.” Attributed to Reinhold Niebuhr, a 20th-century theologian who often used variations of the phrase in his speaking and writing, the prayer has been adopted as a core statement by Alcoholics Anonymous and other 12-step programs. While the specific words may be Niebuhr’s, the philosophy they embody is timeless. The ideas can be found in ancient Greek, Jewish, and Buddhist writings, as well as popular culture (for example, when Clint Eastwood, in Dirty Harry, says, “A man’s got to know his limitations”).
Accepting Uncertainties, Making Changes
How does the Serenity Prayer apply to retirement planning? Well, it starts with accepting that some issues that will significantly impact your financial well-being are also beyond your control. You can identify these items, but have very limited ability to anticipate, change, or avoid them.
In a recent article titled “5 Retirement Variables Outside Your Control,” US News & World Report writer Emily Brandon listed the following items:
• How long you will live
• Investment returns
• Inflation
• Health care costs
• Emergency expenses
Because we recognize patterns in history–regarding nations, wars, investments, etc.–we are intrigued by the possibility of guaranteeing the future if we can completely comprehend past events. But history also shows the repeated introduction of elements unknown to previous generations. Thus, because the future will always include new and unanticipated events, the past cannot be used to eliminate future uncertainty.
Yet in formats that attempt to guarantee a secure future by making better projections/guesses, the first three items are foundational assumptions that determine a plan’s recommendations and results. But while length of life, returns, and inflation will definitely impact one’s retirement, we cannot know with certainty how they will unfold. This uncertainty is further complicated by the last two items on Brandon’s list, because they are likely but random events, whose occurrence can completely upend these assumptions. To stubbornly continue to make plans for the future based on these factors beyond our control is a recipe for frustration and turmoil.
Accepting that many factors in retirement are outside our control does not mean we are powerless to make our financial future better. But rather than spend an inordinate amount of time trying to project results, we might be better served by focusing on what can be managed in the present.
A recent forum of financial professionals issued a single-page document titled “Uncommon Steps to Financial Success.” They are:
• Organize your financial life.
• Maximize financial protection (insurance).
• Save 15–20% annually.
• Accumulate short-term liquidity equal to one year of net annual income.
• Carry no short-term debt.
Many households may not be able to rearrange their financial assets to immediately align with these recommendations, but these items are specific objectives that can be achieved through planning and execution–these are things we can conceivably control. And while there are no guarantees about the future, it is obvious that anyone whose present circumstances match these five criteria has good reason to be optimistic about what lies ahead. Consider: The benefits of a well-organized financial life should be self-evident. But quite often, the details and urgency of everyday living make financial organization an infrequent and haphazard activity. We prepare financial statements only when we need to borrow money, or our children request educational assistance.
Insurance is one of the best ways to respond to financial uncertainties in life; it is cost-effective, and allows assets that might have been held in reserve (as “self-insurance”) to be applied to more profitable opportunities. The general public has an ambivalence toward insurance, and often tries to minimize or avoid using it. But under-insuring increases one’s exposure to financial calamity.
The ability to save 15–20% of one’s annual income indicates a balance between one’s current lifestyle and his/her ability to sustain that lifestyle in the future. This is also an indicator of financial self-control, and emotional stability regarding money.
A year’s worth of income in liquidity makes the near future a lot less anxious, even if it is unknown. A decline in income, a loss of employment, an illness, a personal problem or other unforeseen crisis–all of these events can be better addressed when substantial assets are readily available.
Short-term debt, especially unsecured debt like credit cards, is typically the most expensive form of borrowing, and consumes a proportionately large percentage of current income. Having to use this type of financing is often an indication of financial imbalance, or misplaced priorities.
The Difference
When assumptions are used to derive financial decisions, a less-than-desirable side effect is the need for constant re-assessment.
Are our assumptions still accurate?
Are we on track?
Has our “magic number” changed?
These types of questions have no definitive answers; instead, there are vague “feelings.” There may be a false sense of security (“We’ve got it made”), or despair (“We’ll never be able to retire”), or confusion (“You mean we have to change again?”). Because of the uncertainties inherent in the foundational assumptions of needs-based projection models, anxiety is an almost inevitable by-product.
In contrast, the Uncommon Steps to Financial Success use no assumptions about the future to determine financial decisions. The focus is on getting the present in order, and believing that maintaining this healthy condition will result in a prosperous and secure financial future. The standards for financial success are clearly defined, allowing individuals to make precise plans and take specific action. Granted, any type of change can be stressful, but at least the stress of uncertainty doesn’t have to be added to the mix. It may be counterintuitive, but making positive changes to your present financial condition is quite likely the most practical and stress-free way to address the future.
By Elozor M. Preil
