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Retiring Soon? Know About The 5-year test?

Retiring Soon? Know About The 5-year test?

December 14, 2020

Are You Thinking About Retiring Soon?

Do you have a good handle on what you spend on a monthly and annual basis today? If you think you do, think again. The detail here is important. There are a lot of retirees who have a rough idea, yet avoid the details. So, if you're thinking about retiring soon, consider that it's not only your investments or pension that matter. It's critical to know what you spend.

There's a recent report from the Consumer Financial Protection Bureau (CFPB) called "Retirement Security and Financial Decision-making." This report found that nearly half of all retirees lacked the ability to maintain the same spending level for five years into retirement. Additionally, two-thirds of younger retirees could not maintain the same level for their first five years of retirement.

The first 5-Year 'Test' survey found that many retirees don't have the assets to keep up their spending. It also showed that financial decisions people made while still working affected their later spending levels.

So What Are the Areas of Financial Decision-Making You Need to Consider More Carefully While You're Working?

Well, let's start with things like your mortgage. 61% of homeowners without mortgage debt could retain spending vs. 55% with mortgage debt, according to the survey. It's important to consider your debt and how that factors into your retirement. It may be clear to you today that you'll have a mortgage to pay in retirement. But, knowing these statistics, perhaps paying a little more toward your mortgage debt today could reduce the amount of time you'll have that mortgage in retirement.

And How About Your Investment Assets?

Have you estimated a future return on those investments based on the past using historical returns? Or are you projecting a more conservative future return?

Of course nobody can predict the future, but there are significant structural changes that could impact your future return. Consider the fact that bonds are at historically low yields today. Yet, if you retired in the 1980's, bond yields were at historical highs. What this means is that today your bonds may be acting more like a headwind in your portfolio. And, consider if rates go up from here, you are more likely initially to see a loss on your bond values rather than a gain, as rates increase. But, in the past few decades, you were more likely overall to see gains on your bonds rather than losses as rates were falling.

Also, consider that in retirement you're more likely to reduce the risk in your portfolio rather than increase it. It's a fairly normal phenomena for those who retire. Hanging on to what you've got by reducing the risk is just one more reason that retirees projected returns may be less than historical.

Adjusting Your Spending Now to Accommodate Your New Normal in Retirement Is of Critical Importance.

While many believe they will spend less in retirement, many spend as much or more in retirement than anticipated. And, when left unchecked, a few years can go by before you realize you've overspent and have less money for your long-term needs. So, adjusting spending before you actually retire is a good idea. And monitoring your spending is a critical component to your success. Being more certain that you can actually live on a specific budget or spending plan may make the difference in passing that 'First Five Year Test'.


Consumer Financial Protection Bureau – Health and Retirement Survey
PlanAdvisor Sept.-Oct. 2020 –

Important Note:

The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance. Actual results or developments may differ materially from those projected.

Nothing in this post should be construed as an offer to sell, nor the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.