Chief executive officers or CEOs call the shots. And they ultimately get most of the credit when things go well and shoulder most of the blame when they don't.
Most Americans don't ever have the opportunity to hold the title of CEO during their working years. As they build their career, most people develop special skills or market knowledge but remain subject to decisions made at higher levels.
But then people reach the end of their working years—or at least the end of their primary career—and all of that suddenly changes. In retirement, everyone becomes captain of their own ship. They become CEO of an enterprise called "Me, Inc." and are totally responsible for their own destiny. They must make myriad decisions about their lives, their finances and their daily existence. It's a challenge that can be both exhilarating and frightening.
The changes can be profound. For starters, many retirees make a fundamental transition to predicating their lifestyle on the capital they have amassed over their career, rather than from the labor that produced the capital. The relationship between labor and capital has been a subject of deep study by many scholars, most notably Karl Marx whose essay "Wage Labour and Capital" attempted to describe the dynamic relationship between one's labor and its value or capital equivalent.
As any new retiree could tell you, though, the father of socialism and others could have saved a lot of time and trouble by simply pondering the issue through the eyes of a typical retiree. In retirement, the value of years of labor becomes readily apparent. Retirees increasingly depend upon the capital they've built over their working years, otherwise known as retirement savings. How much capital they create can directly affect the quality of their life in retirement.
Sure, Marx would view today's retirement as bourgeois. But the inescapable reality is that retirees can expect to increasingly rely on their capital as their productive capacity diminishes, sometimes because they simply desire to work less, sometimes because their health declines and sometimes because of other factors.
This transition can follow different paths. For some, the shift to retirement can be like slamming on the brakes while traveling at 100 miles per hour. For an increasing number of people today, it can happen gradually over several years, more like downshifting or tapping the brakes to reduce the speed or change direction.
But whatever the situation, a successful retirement, like a successful business venture, requires considerable planning and foresight. Financial advisors know that planning is an iterative process that can veer slightly or dramatically through the years as life twists and turns. And getting an early start helps. Research conducted in 2011 by The Hartford and MIT AgeLab showed that many of those who are most successful financially—defined as those with investable assets of $250,000 or more—actually started planning for retirement when they start their first job.
Advisors can best help their clients get started by helping them get in touch with their inner CEO. Successful CEOs articulate a clear vision for their company, and successful retirees need to be able to do the same. Encourage clients to develop a vision of what retirement could be—and then guide them through a disciplined process to determine what it will realistically take to get there. In some cases, the vision may have to be refocused depending upon the realities of finances, health, family obligations and other factors.
Start with the necessities. Identify costs for basic living expenses such as food, rent or mortgage payments, and if applicable, taxes, electricity and the cable bill.
Does the client consider an annual vacation a must have or an item that is nice to have? Does he or she need to travel to see family, and if so, how often?
Consider the cost of hobbies, recreation, dining out, entertainment and other lifestyle choices. Again, depending upon finances, executive decisions may need to be made to prioritize the relative importance of lift tickets or theater tickets, an economy car or a sports sedan, green fees or greener pastures.
Personal priorities also extend to decisions, such as donating time and money to charitable causes, helping with college tuition for grandchildren or becoming a caregiver for another family member or friend. Many people have visions of becoming more charitably inclined or becoming more involved in their communities during retirement. What will it take to make that vision a reality?
Outside of generating a vision, a CEO has another very important responsibility—managing their enterprise's finances. This includes reviewing the cash flow needed to maintain the business, as well as knowing how to access additional funds in the event of an emergency or emerging opportunity. Advisors can put clients on this track by encouraging them to tally sources of guaranteed income such as Social Security, a pension or, increasingly, a guaranteed income option within a 401(k) or other defined contribution plan.
Next, review individual retirement accounts and other sources of savings and investments that can be transformed into income.
Ideally, there should be enough of an income base to cover daily living expenses. If not, the CEO may have to make some tough choices about working longer before retirement, continuing to work in some capacity during retirement, saving more or a combination of those efforts.
Once the income base is established, determine what other assets are available to cover nice-to-have lifestyle expenses such as season tickets to the orchestra, a slip at the marina, gas for the RV, tuition assistance for the grandchildren or maybe gifts of cash for their church or synagogue.
Assets also need to be set aside for older ages when medical costs are likely to increase and the effects of inflation may be felt more acutely. Although most people don't envision paying double for a loaf of bread in 20 years, inflation even at lower levels can have a big impact over time.
Going through this analysis with your clients can help them put forth a plan that is both rational and sustainable. Ultimately, it can greatly improve their chances of success as CEO of their own retirement, helping them enjoy the praise of power rather than the jeers of misjudgment.
John Diehl, CFP, is a senior vice president for The Hartford's
wealth management business. The views expressed here are those
of John Diehl and should not be construed as investment advice.
"The Hartford" is The Hartford Financial Services Group, Inc.
Annuities are issued by Hartford Life and Annuity Insurance Company
and Hartford Life Insurance Company. The Hartford is a founding partner
of the MIT AgeLab, which is not an affiliate or subsidiary of The Hartford.