Adventures in Retirement Planning
Published On: December 8, 2017
Written by: Ben Atwater and Matt Malick
Preparing for retirement is a more difficult goal than people imagine. Working with clients on detailed retirement plans over the last nine years, we have approached planning using two different tools. During the last three months, as we’ve transitioned from one program to another, we’ve gained additional insights into the planning process.
Quite reassuringly, despite the different software programs, we have found similar results for clients who have been through both processes. In each process, we employ Monte Carlo analysis where we rely on repeated random samplings of historical investment returns tested against cash flows to determine a probability of success (i.e. in what percentage of the random scenarios do you have money left to pass onto heirs?).
Each program, however, draws its returns from different time periods, uses different rates of inflation and includes different asset classes. Nonetheless, the results are similar. We are encouraged that approaching the planning differently still generates similar results. Anecdotally, we think it helps validate our planning process in general.
Although the results are similar, the new process is more dynamic and thought-provoking. We spend additional time with clients thinking about expectations and concerns, which, directly and indirectly, better frame the discussion. This is particularly the case when it comes to estimating spending in retirement. Making an assessment of your priorities, values, goals, lifestyle, desires, etc. allows you to make more realistic projections for what you’d like to spend in retirement.
Spending in retirement is still the greatest challenge in creating a realistic plan. We find that people generally underestimate what they spend now and fail to think about some of the expenses that retirement brings. Categorizing spending more specifically, in areas like healthcare, cars, travel, home improvements, weddings, a new home, gifts and donations, etc. and dividing these between needs, wants and desires can help make decision-making easier. Generally speaking, even for the mass affluent, retirement goals are a tradeoff, sacrificing one ambition to enhance another.
Exploring various options like early retirement, spending levels, investment risk, additional savings, when to take Social Security, etc. sheds light on determining the right plan for you. There are so many moving parts that being able to quantify changes in each is invaluable.
We are excited about delving deeper into retirement planning. Not only do we have some excellent tools, but we have a great deal of experience and good intuition for providing ideas and answers. For now, here are a few general retirement planning observations that we’ve considered in recent weeks:
Please visit www.atwatermalick.com/ria for full disclosure materials related to recommendations contained in this update.