Don’t Take the 5-Question Solution to Your Retirement Plan

“Can I afford to retire?” and “Am I going to run out of money?” are two fundamental questions often posed to personal financial planners. I wish that we could address these issues easily and that we could provide answers with a high degree of confidence. Alas, we cannot.

Both questions, depending on your stage of life, are a function of many variables, including the following 10 categories:

  1. Your pre-retirement income.

  2. Your pre-retirement savings rate.

  3. Your lifestyle living expenses, both recurring expenses and periodic, lump sum expenses. Add assumptions for changes in living expenses over time, such as whether your expenses will decline as you become less active and whether your expenses may increase for long-term-care needs.

  4. Taxes and changes in tax rates over long time periods.

  5. Inflation.

  6. Your investment portfolio returns. This category includes the “sequence of returns,” wherein your probability of success diminishes if you have negative or low returns in the early years of retirement.

  7. Social Security benefit changes as determined by politicians.

  8. The coverage and costs of health care and Medicare, as determined by insurance companies and politicians.

  9. Your potential to receive an inheritance: when and how much.

  10. Your life expectancy: How long are you going to live? Perhaps the biggest variable of all!

Long-term projections are extremely sensitive to assumptions. Change the inflation rate or investment return assumption by 0.5% per year, and the results change dramatically over a 20-, 30-, or 40-year time period.

Marketing campaigns by insurance companies, brokerage firms, and mutual fund companies promote simple answers and solutions to this multifaceted, dynamic challenge. Don’t fall for a “What’s your number?” campaign or five-question website solution.

Depending on your stage of life, we prefer to focus on your savings rate while you’re working and your portfolio withdrawal rate when you’re retired. We offer a “Financial Goal Plan” that is highly advanced and customized for you. We clearly state that the results are sensitive to assumptions and that no such projection can provide any certainty. As always, our goal is your financial peace of mind, so contact us if you wish to discuss this further.

Enjoy these early summer days!

As always, please contact us with any questions, news, or comments.