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Adrian Mastracci, portfolio manager at KCM Wealth Management, says “At age 60, the retirement plan can easily span 25 to 30 years, possibly more. A longer life expectancy requires a bigger nestegg, especially for women." |
Vancouver, BC (October 23, 2006): No doubt, investors want to be ready for retirement. But is retirement truly ready for them?
Abe Lemons, successful basketball coach, once said, "The trouble with retirement is that you never get a day off."
Adrian Mastracci, “fee-only” portfolio manager at KCM Wealth Management, comments, “Investors face a multitude of decisions in mapping their retirement roadway. Preferably, a roadmap that withstands the tests of time. Especially for boomers who are at the doorstep.”
On a recent vacation, the children challenged me to a round of “The Game of Life”. For those with young children, grandchildren, nieces, or nephews, the game entertains and mimics life events.
I started by going to college, so I promptly borrowed $100,000. I also bought a home, established careers, encountered financial surprises and much more. Now let’s fast forward to the conclusion.
The good news is that I retired to the “Countryside Acres”. The other news is that I still had loans of $380,000. Ouch! Not the stellar retirement plan worth dreaming about.
Well, it reminded me of the surveys published earlier this year. The ones that concluded some retirees didn't mind paying loans into retirement. Worse yet, there were many not well prepared for retirement.
Importance of retirement planning
Planning retirement is about setting the long haul course of action to achieve a specific personal return. The course is more than selecting stocks and funds. Perhaps, a total financial makeover.
Start at least 10 to 15 years prior to retirement. Longer is desirable. During accumulation, investors need to find the delicate balance between spending today and saving enough for retirement.
At age 60, the retirement plan can easily span 25 to 30 years, possibly more. A longer life expectancy requires a bigger nestegg, especially for women. I typically add 5 to 10 years to life expectancy.
It's also possible that no more funds are added to the portfolio once retirement begins. Essentially, the plan has to sustain income draws for a long time. Say for the lifetimes of two spouses.
So, what should investors do to avoid retiring as I did in the Game of Life? I've assembled five fundamental ideas to improve the retirement readiness prospects.
1... Focus on long-term expectations
Achieving a successful retirement is about three key things. Taking the long-term view, having a well diversified portfolio and avoiding large losses.
Investors ought to focus on what the nestegg is to provide. Refresh the desired retirement incomes. Confirm that the goals are realistic. The advisors should be asking the same things.
My experience indicates that the family expenses just before retirement are similar to those after retirement. The individual allocations are a little different.
I don't focus on replacing arbitrary percentages of pre-retirement income. Rather, I focus on replacing the total expenses. That sum is easily translated into a before-tax income ballpark.
2... Size up the nestegg
Say two spouses, ages 50 and 48, want a retirement income of $75,000 in today's dollars starting in 10 years. They need to accumulate about $1,700,000 of assets if they have no employer pension.
This sum is over and above CPP, OAS and their residence. By contrast, a $50,000 income goal reduces the nestegg to about $975,000. Hence, it's important to understand the math of retirement.
The key is the investment rate of return required to achieve the retirement goals. All within the investor's saving capacity, risk tolerance and time horizon.
The risks of seeking a 6% investment return are different than aiming at 12%. Expectations may need adjustments if the risk of loss is too great to endure.
Examining where the investor is right now and what has to be done is time well spent. It sets the scene for the design and implementation of the right game plan.
3... Develop the appropriate plan
Investors approaching retirement will need to switch from accumulating the nestegg to drawing income from it. This may require investment strategy changes to initiate and sustain the draws.
Asset mix has a large impact on portfolios. One vital area is the appropriateness of the mix. Retirement portfolios typically include a mix of equities, bonds, cash instruments and real estate.
Capital preservation is central to many retirees. Perhaps, also the need to continue growing the nestegg during retirement. Therefore, the long haul management of the finances is ever so important.
However, some investors make radical changes to the asset mix. Such as becoming too conservative during retirement. This may necessitate adjustments to income if inflation rises or returns drop.
Investors should not let risk be the dreaded word. Understand the types of investment risks being incurred. The game plan always considers the ability, willingness and need to incur investment risks.
4... Activities in retirement
Everyone has to consider what activities to pursue during retirement. Especially, those who retire at a predetermined age. Mr. Lemons was right.
This is just as important as the financial pursuits. The success stories I'm aware of would say that a satisfying retirement is about pursuing activities that bring happiness.
They range from travelling, pursuing old and new hobbies, becoming a mentor, doing things with the family, part-time employment, charitable activities, community pursuits, writing and many others. The key is to maintain productive and stimulative activity.
5... Mull over the retirement spoilers
Unthinkable as it seems, every investor ought to mull over what factors may spoil the well planned retirement. Four potential spoilers come to mind: inflation, health costs, low returns and large losses.
Increasing the inflation rate by 1% makes for some ugly numbers. Say inflation is 3%. Each $10,000 of today requires $18,100 in 20 years. This jumps to $21,900 at 4% inflation. That hurts the finances.
One never knows when health costs may spring nasty surprises. Long-term care facilities can easily cost $1,000 to $4,000 per month. Even basic in-home care may cost $500 to $1,000 per month.
The portfolio may experience periods of low returns, no returns or bear markets. We've had 23 bear markets since 1900. Taking on more risk is a strategy full of dangers for retirees.
Most retirees no longer put money into their portfolio. Therefore, incurring a large loss is a must avoid. Wise retired investors have learned to take small losses. Little ones are far better for retirement plans.
The funds withdrawal rate may need adjustment if the comfort zone slips to low levels. I do a "what if" analysis for every client to get a handle on the level of financial safety.
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The outcome of this exercise is that the retirement plan may require some rethinking of personal strategy. Then again, the game plan may be right on target.
All investors have personal game plans, right! Plans that make sure retirement is ready for them.
I welcome your questions, comments and feedback.
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