Real success is not defined by one’s attainment of a higher status or wealth; rather, it is better measured by one’s ability to sustain such status. For a retired individual success is really defined as one’s ability to sustain a lifestyle one has enjoyed in the working years. Many people who live in retirement today are struggling to cope with life after enjoying a very successful working career due to inability to sustain the success achieved in the early days. They actually once thought that their early prosperity was everlasting and failed to recognize the vicissitude of life. Nobody actually plans to fail deliberately in any venture/task but life is so dynamic that when it unveils its hidden agenda, it shakes us and sometimes affects the root of our existence life is a cycle, where you move from one stage to another and each stage is associated with it’s nuances. Finance is so important that we all relate to our financial life as an integral part of our being.
As our growth has a life cycle, from infancy to teenage and then to adulthood, each of these cycles has their respective financial implication. Hence, as we grow in a normal life cycle, we must consciously plan how to make growth easy by conducting a good financial plan to attend to each growth stage in life. At infancy, we have no clue as to our financial situation except by referencing the financial position of those who undertook the burden of our responsibilities and ensure we were catered for. We navigated from this stage to acquire skills and knowledge, which place us in a better position to gain financial strength when we put both into use. They become our endowment (human capital) with which we gain financial power. However, no matter how we work, it is inevitable that we become weak at a particular time when we can no more boast of physical strength and when our knowledge becomes inadequate to cope with the advancement of time. This is a time of retirement! A phase of a cycle earlier described and which must be planned for. As we grow up in acquiring our financial assets, we get accustomed to some set of habits, attitude that defines our personality and way of life. This defines who we are in the society and what we are known for. It defines the class we belong to and our social status. During our working years, we build relationships by our own choice and this relationship defines our outer being. This is our lifestyle; our own set of attitudes, habits, or possessions associated with us. Maintaining a lifestyle comes with its associated cost implications. Meeting varied societal expectation could be costly given its effects on different aspect of our lives; our children’s schools, where we live, the car we drive, the type of household we keep, the clubs we belong to and the activities we engage in and what we are passionate about etc. We often spend humongous amount of resources to keep these lifestyles and most of time, because our financial quarterback is still like a spring, we have no problems financing our lifestyles. With longer retirements and fewer employer-provide the post-retirement benefits, individuals are by necessity becoming responsible for a growing share of their lifestyle funding during retirement. However, it is not simply a matter of having enough resources, but also how they are utilised to meet objective. Consideration must be given to the many risks retirees face; risks that were previously less prominent or were mitigated by employer-provided programs or other sources of income. Most importantly, for an individual’s who has chosen a particular lifestyle, the objective of “a Retirement Plan” is not only the return expectation from investment of financial resources, but the uncertainties surrounding the ability to sustain a lifestyle! Many dread the ignominy and public shame associated with their inability to do what they have been doing before under the watching eyes of the society. May professionals have been living flamboyant lifestyle that upon retirement, they hardly can keep same. It can become so much of psychological pain and emotional trauma to many having been active before but now have to maintain a low profile lifestyle! “How do you
explain my inability to be active in a boat club or join my colleagues sailing”? A foreign client once said “Many of my colleagues have their private jets but can no more maintain same at the retirement phase of life. Sustaining lifestyle during retirement can most be because of some risks associated with retirement generally. These risks are discussed as follow:
Longevity: This is the risk of living longer than one’s resources. The employer-provided retirement benefits in form of contributory pensions are increasingly being paid out in a form that does not guarantee a lifetime income. With inadequate resources, the longer one lives, the earlier the necessity of lifestyle re-adjustment. This can have a significant effect on the purchasing power of the financial assets of the retiree. Where the regular income of retiree is in fixed income or assets not aligned with the inflationary trend, it poses a great danger to the purchasing power and really most contributory pensions do have issues with inflationary risk.
Investment: With an increasing share of responsibilities for retirement funding and longer investment horizon, retirees often invest a portion of their assets in equities, subjecting them to market risk. Another investment risk is interest rate risk. A common strategy of people who retired a decade or two ago was to invest their retirement assets very conservatively in fixed income products such as certificate of deposit or fixed rate annuities. They saw their income decrease upon renewal of these products as interest rates declined since then.
Economy: The state of the economy can post significant risk to funding lifestyle after retirement. Many retirement funds have gone under drain due to economic downturn of one’s country. Unfavourable macroeconomic policies may endanger well-funded businesses that have become the main financial springboard of a retiree. It could be a case of force majeure or even shift in demand for key retiree’s business.
Health: Healthcare issue may deal serious blow to one’s resources that makes sustaining lifestyle difficult. If a retiree suffers major health setback at the early stage of retirement, this may drain his/her resources significantly to the extent that after recovery, his/her lifestyle may necessitate re-adjustment. The rapidly escalating cost of healthcare and prescription drugs will continue to strain retirees’ limited resources going forward. While Medicare covers a small part of long term care, most long-term care is not covered either by employer sponsored health plans or Medicare. An extended period of long-term care needs can decimate even a fairly substantial nest egg, and providing for long-term care is a major issue for many individuals.
Source: Meristem Wealth