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| Adrian Mastracci, president of KCM Wealth Management, says “This is the simplified view of reverse engineering for the nestegg. The scope of what the portfolio has to achieve for a successful retirement to be realized." |
For Immediate Release
Vancouver, BC (February 28, 2005): Before I saw the light in my third year of university and switched to pursue finance and business, I was happily enrolled in engineering.
I can already hear the engineers in the crowd wanting to have a few words with me. But hold just a moment please. I have some good news. Some very good news.
Adrian Mastracci, investment counsel at Vancouver’s “fee-only” KCM Wealth Management comments, “Engineering did me a world of good. I really got my money’s worth. Better yet, I still use that body of knowledge every day in assisting clients with investment strategies for managing their portfolios.”
You’re probably wondering how that could be. What would engineering and finance have in common to mix so admirably?
Well, they do share some math concepts, but we won’t go there. That would be a wonderful recipe to put everybody to sleep.
So, let’s get to the main event. I call it reverse engineering for the retirement nestegg. Working backwards from the desired end result to come up with the unique strategy for each investor.
Engineers know what I’m driving at. And, thank heavens they’re not mad at me any more.
The need for reverse engineering
Investing for the retirement years is a journey. A long haul journey, not a sprint. Arguably, the most demanding task facing investors today.
Investors reach a point sometime in their lives when it’s appropriate to turn their attention to accumulating the retirement nesteggs. Perhaps, it becomes the focus for investing.
The retirement queries take many forms. An important question might be about when one can retire. Or, what level of income one can expect during retirement. Perhaps, how someone is doing in relation to the retirement goals.
There are three primary goals of retirement. First, to establish the reliable income stream. Second, to safeguard the income stream from the ravages of investment risks. Last, to distribute the remaining estate to the loved ones.
Decisions about retirement planning have significant implications. Not only during the accumulation years, but also throughout the actual retirement. For most investors, the accumulation begins to receive that serious attention after they reach the magic 40.
It’s particularly important for investors to implement a personal strategy that achieves the desired results. This is where reverse engineering can help.
What is reverse engineering
Reverse engineering for the retirement nestegg is a blend of both art and science. In addition, it’s made up of two components.
The first is to estimate the size of retirement nestegg that represents the individual goal of retirement. The second is to figure out what the nestegg has to accomplish from today to arrive at the desired destination or maintain the already achieved goal.
Let’s consider an example. Assume that $1,400,000 is the estimated retirement nestegg to be achieved. Say there are 10 years to retirement and the current portfolio is $600,000. That implies an annual return of just over 8.8% to get there.
However, a saving capacity injection of $10,000 per year reduces the rate of return to about 7.7%. Similarly, injections of $20,000 or $30,000 per year reduce the required rate of return to about 6.5% and 5.4% respectively.
This is the simplified view of reverse engineering for the nestegg. The scope of what the portfolio has to achieve for a successful retirement to be realized. The backwards look.
What to do with the information
The critical part of this exercise is the investment rate of return required to achieve the unique retirement target. That personal rate of return becomes the ‘minimum investment benchmark’ for the investor’s long-term game plan.
Once the investor knows the personal rate of return, there is less need to incur any more investment risk than necessary.
The goal is to map out a suitable investment plan of action for the investor. This is especially important to someone who has reached the retirement goal.
“My premise is that retirement aspirations have significant implications on every client investment portfolio,” summarizes Mastracci, “The reverse engineering answers provide essential elements for the strategy and structure of the client’s long-term investment plan.”
“I relate all portfolio review discussions to the client’s own personal rate of return. Nothing else matters,” explains Mastracci.
“I’m very happy to have started my investment career in engineering. Learning about working backwards to get to the appropriate answers,” concludes Mastracci, “Yes, the engineers have it right.”
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