Managing for a worry-free retirement.
A million dollars may have sufficed for our parents
to maintain their standard of living in retirement. As baby boomers
we will need millions to achieve a financially secure retirement.
Many successful San Francisco Bay Area families
earn incomes well into the six and even seven figures. This income
represents portions allocated to saving for retirement, through
the 401(k) or pension plan and Social Security (i.e. expenses
you won't incur in retirement). In retirement these families'
travel, entertainment, gifting and medical expenses (i.e. additional
retirement expenses) may dictate that they maintain the same income
level they enjoyed during their working years.
We have researched retirement income strategies
financial planners tend to implement on behalf of their clients.
Many suggest if inflation is running at 3 percent and you receive
an income of 5 percent or 6 percent a year from your investments,
while they perform at a rate of 6 percent to 8 percent, then you
are home-free. WARNING: this may be hazardous to your retirement
future!
We have also heard investors asking why not live
on the growth of the portfolio from the previous year, since this
would leave the principal intact. Our response is what if the
market is negative for a year or two? How will you live?
Since 1988 we have been studying quantitative retirement
income methodologies and we have concluded that many of these
methodologies have massive assumption/planning failures (see our
Dec. 9, 2005, article or visit our Web site). Furthermore, since
the stakes are so high ‚ your golden years ‚ we believe you deserve
a better solution.
Income planning methodologies seem to follow the
path of fear and scarcity. They ask "what if we pull too much
income out and run out of money?" We wonder how they would answer,
"What if you take out too little and it's too late by the time
you find out?" How might that affect your retirement lifestyle?
What would you have missed out on in retirement?
Our process encourages families to envision and
achieve the best lifestyle they can afford without sacrificing
their financial security.
So what if inflation is running at 3 percent. If
you need a 6 percent income increase and your wealth can fully
support it, then we would recommend a pay raise. The families
we deal with live in the real world, with foreseeable and unpredictable
life changes (divorce, death, retirement, business sale, terrorism,
market volatility, etc).
What would you do if your child's life pivoted
on a $250,000 experimental cancer treatment your insurance company
won't cover? Would you really want your planner to tell you that
paying for the surgery would destroy your financial future? Of
course not!
One of the most valuable things wealth managers
should provide you are their ears (listening to you) and hearts
(understanding what's important to you). Your adviser should help
you identify and prioritize your life goals. Start with a "what's
important to you" conversation (see our Oct. 14, 2005, article
or our Web site).
Once your priorities are determined, your adviser
should offer you what-if and trade-off scenarios. The retirement
plan and answers your adviser helps you arrive at are as much
about your personal values as they are about your portfolio values.
Your planner should never accept the status quo and should be
constantly updating and adapting your plan to the myriad of life
events, both within and outside of your control. The best worry-free
retirement income plan is driven by an adviser who understands
your values, goals and income needs.
You need an adviser who recommends a pay raise
for you when your portfolio gain over a period of years justifies
it, one who you trust and who can send you a quarterly or monthly
income check. Let your adviser worry about the portfolio management
and fluctuations (see "The Informed Investor Making Smart Decisions
in Today's Volatile Market" at our Web site) while you enjoy your
family, causes and activities and your retirement. Our clients
have lived through the longest bear market of our generation (2000-2002)
and we have yet to have any of them run out of money. Some had
to make minor adjustments to their lifestyle; others didn't. While
there is no "retirement income silver bullet," values-based dynamic
planning can get you the worry-free, financially secure retirement
you deserve.
Christopher G. Snyder and Haitham "Hutch"
E. Ashoo are principals of Pillar Financial Services in Walnut
Creek. Contact them at 925-356-6780.
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