Retirement Planning
Multidimensional Thinking for Retirees
Interestingly, for all the obvious differences between age groups, retirees tend to make the same mistake as their young counterparts when it comes to planning their financial resources. Specifically, they buy CDs, invest in bonds, amass large amounts of equity in their home, and then look around to see what that produces for income. In essence, they allow their financial plan to dictate their life plan. They’ve put their (financial planning) card before the (life) horse.
If retirees would first consider their life goals and then develop a financial plan to support that life (put the horse before the card), they would feel much more in control and find that life becomes ever more fulfilling.
The majority of financial planners take a fairly remedial risk-averse approach when it comes to investment recommendations for retirees. They fall into the same trap as their clients—they propose the overriding goal of protecting the next egg at all costs.
Clearly, no one should jeopardize his nest egg. However, first consider the retiree’s dreams for life—almost as if money were no object—before committing to a particular financial strategy. For example, if everything in life were free, what would the retiree do with this next twenty-five years—from age sixty-five to age ninety? If you can get the retiree to dig deep and to answer this question honestly, then the financial plan will begin to take shape. The point of the exercise is to suspend thoughts about money and instead focus on what he wants to do with his life.
This thought process takes time—sometimes days, weeks, or months. What does he want to do with his life for the next twenty-five years? The financial planner must wait until the retiree answers this question. Then and only then will the planner be able to help arrange the retiree’s financial portfolio to accomplish support for this life plan.
For example, suppose a retiree is successful and has accumulated $750,000 by age seventy for a nest egg. At this point, his home is completely paid for (or almost paid for) and only requires a low monthly maintenance. Between his pension and Social Security, he is able to pay his monthly expenses.
If the $750,000 were invested in bank instruments (certificates of deposit) earning 4.5%, interest earnings would equal $33,750 a year. Instead of bank instruments, what if he used the same approach that created the $750,000—or an appropriate asset allocation using a combination of mutual funds and variable annuities? If he were able to get a 12% return, his income would jump to $90,000 a year, or a difference or $56,250 a year. Without adjusting for inflation, that’s a difference of $1,406,250 over 25 years—almost $1.5 million—and the principal investment of $750,000 is not touched. Would this person make different life choices if he knew, at the conclusion of the financial planning process, that somebody would walk in the door and hand him a check for $1.4 million? You lose opportunity and money if you create your financial plan without a life plan and instead allow the financial plan to dictate your life choices.
Case Study
About six years ago, Mary came into my office with a hodge-podge of a financial plan—really no plan at all. Two years before our meeting, her husband had died. She had some mutual funds with a stockbroker in Chicago, a couple of annuities, some CDs, and a large amount of money in her checking account. When we started the process, her goal was to organize her financial junk drawer into a cohesive plan. As we went through the financial planning process, eventually we managed to double what she had anticipated her monthly income to be. As we rearranged her investment allocation, she was astounded that her income could be that high. She could not fathom that her income could increase from $2,000 a month to $4,000 a month simply through rearranging her assets into a coordinated portfolio.
During the first year of this new plan, Mary maintained her same spending habits. The additional income accumulated in her investment portfolio so that it grew at an even faster rate. In the second year of the program, Mary could see the reality of her increased income, because it was accounted for on confirmation statements and annual reports.
One day I was in a staff meeting and my assistant interrupted. “Mary is on the phone, and it is fairly urgent that she talk with you right now if you can make it.” I left the meeting and thought something serious might have happened to Mary.
On the phone, Mary explained, “I’m visiting my grandchildren in a city about two hours away. This past week, I’ve had a difficult time squeezing my grandchildren into my small car.” On a whim, Mary had stopped at a car dealership and fallen in love with a van. “Right now, Stephen, my five grandchildren are climbing all over this van. The salesman says this van is a great vehicle for a grandmother. Your told me that I could spend more money, and I want to buy this van. Do I have enough money?”
Her enthusiasm dripped through the phone, and I laughed with her. “Absolutely, Mary. Buy the van.”
Speak with a Recommended Financial Professional about retirement planning >