What if I Don't Have Enough to Retire?

There are options for those still needing a larger nest egg, explains Morningstar's Christine Benz

Ruth Saldanha 24 February, 2021 | 4:38AM
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Ruth Saldanha: All of us work towards something, and for many of us that something is retirement. Unfortunately, the sad reality is that sometimes despite our best efforts, our plans may fall short. I'm here with Christine Benz, Morningstar's Director of Personal Finance, to talk about some of the options that investors might have if they discover that their plans have indeed fallen short.

Christine, thank you so much for being with us today.

Benz: Ruth, it's my pleasure. Great to be here.

Saldanha: Now, if you're excited about retiring, hearing that you may have to work longer, might be a major mood killer. But that's the most logical option if you don't have enough, is that right?

Benz: It really is. And the way I would say that retirees or would-be retirees can make peace with this. Remember that it doesn't have to be a career that you hate. If you have a job that you really cannot stand, it's not even good for your health to continue doing that job. But if you're able to continue working in some capacity, so if you are able to forestall having to take withdrawals from your portfolio and continue to earn some type of an income, you may be able to find work in a profession that is less remunerative perhaps, but more gratifying, just something that you can live with. So, I always urge people in their 50s to start thinking about, well, what is my fallback profession? If for whatever reason I can't or don't want to continue working in this current career, what would I do instead? So, just to kind of start thinking through those things.

And then, another important point I would make, Ruth, is that our colleague, David Blanchette, who does retirement research for Morningstar Investment Management, has focused on this idea that people can't always work as long as they might hope that there are things that can keep them out of the workforce, whether it's health issues, spouses' or parents' health issues or maybe just ageism in the workforce. We know that's a thing. There are issues that can keep someone from being able to work. So, even if your goal is to continue working until you're 75 or something like that, because that really works from the standpoint of your financial plan, just bear in mind that that's not always workable. So, you need a fallback plan in case for whatever reason you're not able to continue working.

Saldanha: One question we hear a lot from our readers is that they want their money to work harder for them. So, is it an option that you could take on more investment risk maybe by changing your asset allocation in order to get a larger nest egg?

Benz: Potentially so. Certainly, there are risks to having a too conservative portfolio today, because one thing we know is that yields are really good predictor of the future returns from safe assets. So, where we are today, which is very, very low relative to historical norms, suggests that very safe portfolios will have very low returns over the next decade. They may not even keep up with inflation. So, if you have a very conservative portfolio, by all means you should have some risk in your portfolio. You should have a decent amount of equity risk. In fact, I work on some model portfolios for U.S. investors. All of the ones geared toward people in retirement have at least 40% in equities. Some of them have 60% in equities. And that really depends on your own situation, your risk tolerance, and so forth. But most retirees today, given that retirement is going to be a 25 or a 30-year or even longer proposition, you need to have equities in your portfolio.

I think the thing that you want to avoid is taking dumb risks with your portfolio. So, yes, you need equity exposure, but you want broad market exposure, geographically diversified, style diversified. You want to be careful about taking big risks on individual companies or individual sectors. That's where you can really get yourself into trouble.

Saldanha: And another option that we hear about quite a bit is a lifestyle change by maybe becoming more frugal. How does that work?

Benz: This is a really important lever that people have to consider how they might change their lifestyle in retirement. Some retirees might say, well, I really don't want to make many changes in my lifestyle and so maybe this isn't an area to look closely at. But if you are willing to be a little bit flexible, you can consider some adjustments. The big ticket one obviously would be if you're willing to relocate to perhaps a lower cost geography, even within your own country, but certainly we know that cost of living is incredibly variable, based on whether you're in a big urban center or somewhere that's less expensive. But you may even be able to find within the geography that you love where your family is, you may be able to find that, well, if I live at the end of the train line because I'm not commuting anymore, I'm still able to stay in that same community with my people, but I don't have to make such a radical adjustment to my lifestyle, so that's the big ticket lifestyle adjustment.

But there are smaller things that you can do. Certainly, we know that retirees tend to spend less on clothes than they did while they were working. There are smaller items around the margins may be preparing more food at home, for example, which we're all doing right now, but some retirees may persist in doing that in retirement. Think about what adjustments that you can make. I really like the idea of retirees, pre-retirees doing a budget prior to retirement and looking at where their expenses might change, looking at those lifestyle adjustments that can result in changes, and I think the empowering thing is that you have more control over this than perhaps you think.

Saldanha: Great, thank you so much for being with us today, Christine.

Benz: Thank you, Ruth. It's my pleasure.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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