10 Things that Keep Me Up at Night
As I was working with one of my clients recently on some retirement planning I ran across this article, titled, “10 things that keep your retirement planner up at night” which pretty well sums up the challenges we face.
The gist of the article conveys that no matter what you do the future is uncertain. Retirement planning cash flow has to be dynamic as it takes into account the prevailing conditions and seeks to account for as many variables as possible to create more certain outcomes. The Imagine Planning system I use utilizes Monte Carlo simulation which, when coupled with the managed volatility of my investment strategies, will give a much better picture of what opportunities are available and, consequently, a best practice for decision making. This holds true for both those in the distribution phase as well as the accumulation phase of life.
My favorite thing from the article is #10 – “The Government May Change the Music Just When the Client Learns the Dance.” Enough said, and that’s why we all need to be open to learning new dance steps. Let’s do it together…
Published by MarketWatch:
Ever wonder what worries the financial professional who helps to arrange retirements? Here’s a list of 10 things that they fear can eviscerate their best-laid plans:
1. The retirement period is indefinite and unknowable
There is no way to definitively gauge the amount of savings needed for retirement. There is a big difference between planning to accumulate enough money to fund a client for 20 years vs. funding a client for 30 years. Have the client save for a 30-year retirement, and they only have a 20-year retirement and they over save by one third and stifle their current lifestyle. Have the client save for a 20-year retirement and they live 30 years, and they under-save by one third and won’t have enough to continue their lifestyle.
2. Almost half of the population may retire sooner than they planned
Depending on the specific research they study, planners know that between 40% and 50% of people retire ahead of schedule. It might be bad health, fear of bad health, the need to be a caregiver for a loved one, the unexpected loss of a job, or any number of other reasons; but the retirement clock may start ticking early. If the planner was counting on an age 65 retirement and the client leaves the workforce at age 60, not only are there inadequate savings in place, but the retirement period will require more savings than expected because all else being equal it just grew by five years.
3. Medical science may exacerbate the amount of savings that are needed
Longevity has increased over time, and new medical advances could bring an increased life expectancy for the client. If the planner was expecting a client to perish by 85 and they live until 95, not only are there 10 more years of retirement to fund, but the expenses needed for medical treatment and long-term care treatment may grow geometrically.
4. The client may have bad timing
What if the client retires at the worst possible time — right before a severe market downturn (sequence-of-return risk) or right before a period of high inflation?
5. “Reckless” spending may take place
Clients may perceive the asset pool in retirement as an invitation to overspend early in retirement because they are dealing with more money than they have ever controlled in their lifetime. There is nothing reckless about an elaborate remodeling of the kitchen and bathroom or buying a boat unless it is paid for by assets that were targeted for food and other required budgetary items later in retirement.
6. High debt service may exist
Clients may have used their home as an ATM to refinance for their children’s education or other pressing matters. Planners know that mortgage debt and other consumer debt can cripple a retirement plan.
7. Housing choices may not be financially appropriate
Studies show that the overwhelming majority of clients want to “age in place.” However, the home that is suitable for raising a family may be unsuitable for retirement living. High school taxes, extra rooms to cool and heat, and a large yard to maintain may eat away at savings. In addition, a house that requires a person to climb stairs and is otherwise not senior friendly can lead to restoration and medical expenses.
8. Investment mistakes may occur
Too often, clients who suffer market setbacks pull out of equities to create a buy-high, sell-low scenario. Research shows that the actual rates of return achieved by mutual funds are typically higher than the rates of return achieved by investors in those mutual funds. This is because investors will base their decisions on recent market movements instead of staying the course for the long run.
9. Retirement programs may lead to over exposure to employer stock
Clients may be forced to invest a disproportionate amount of their retirement funds in employer stock. If the company gets into trouble, the clients retirement nest egg and their job may be simultaneously threatened (ask any former Enron employee).
10. The government may change the music just when the client learns the dance
There are fewer product and planning solutions available to the planner to combat public policy change risk than there are for most other types of risks that a client may face. Planners may be helpless if the government radically changes tax policy or takes away a public program on which the client was counting. Consider the small mess that was created by the impending retraction of the file-and-suspend strategy.