Why Traditional Retirement Planning Doesn't Work
Ask many baby boomers how they feel about going through a comprehensive financial planning process and more than a few will roll their eyes and some may even wince. Why is that? Isn’t financial & retirement planning supposed to make one’s life easier and more secure? Here are some of the responses this advisor has heard in the past.
“It’s not convenient/I don’t have the time/Too much info to gather,” “I’ve been through it before and it didn’t tell me anything I didn’t already know- save more- spend less,” “ My plan is never updated; I don’t know if I am still on track or not”
Add on top of that some client exercises that seem to be a bit illogical yet are commonly used by many advisors:
- Completing a risk questionnaire/profile that asks them how much investment pain they can bear, and then design a portfolio (asset allocation) to deliver exactly that
- Provide monitoring reports that benchmark market indices that clients don’t understand (and don’t have any real relevance to their personal retirement goals)
- Continually calculate their shavings shortfall “gap” to remind them of the additional sacrifices they need to make in the current lifestyle
- Repeat all of the above each and every year (if they even see their advisor again, that is)
It’s no wonder that many of the people getting ready to retire haven’t sought out help or stop the process after a while. But is there really a better process? True financial planning is about helping you live the one life you have, the best way you can without making undue sacrifices and taking unnecessary investment risk. Making the most of your financial life requires asking the right questions and pulling the right financial “levers”. The “right” questions are: 1. What are your personal levers 2. How long is each lever for you? 3. What are your personal values & priorities?
Our financial levers are:
Investment Risk
Savings
Retirement Age
Retirement Income
Education
Legacy or Estate
Your Dreams
The next step is to determine how long each lever is for YOU. Assigning an Ideal and Acceptable value to each lever will accomplish this. For example, an Ideal retirement age might be 59, but 62 would be Acceptable. $120,000 a year would be Ideal for retirement income, but $100,000 is acceptable. Learning to fly, buying the beach condo and traveling to Europe twice a year might be Ideal Dream goals but just traveling twice a year to the
The third step is to prioritize these levers to achieve a personal balance. Prioritizing levers is a never ending process, as our feelings about them can change from time to time. Prioritizing these mean asking yourself some thought-provoking questions like:
“Would you delay retirement by one year if it meant…. Taking less investment risk? More travel? Increasing your estate?
Would you reduce your retirement income by 5% if it meant…. Retiring two years early? Getting the beach condo? Save less?
Once all of the right questions are asked and answered, it is time to “stress test” each of your levers. This analysis has someone live 1000 different market lifetimes and ask: What if? Did you meet or exceed all of your goals? Did you fall short, of so, how much? Sometimes you may sacrifice too many life choices. If in 900 or more out of 1000 simulations you exceeded all of your goals, perhaps you are making needless sacrifices in life. Perhaps you can take less investment risk or simply “dream bigger”. On the other hand, if in more than 250 out of 1000 simulations you failed to exceed your goals, perhaps you need to view goals more realistically or start moving some of your financial levers. The main objective with stress testing your goals is to find a balance. That means in 750 to 900 simulations you were able to meet or exceed all of your goals.
Good retirement and financial planning is about managing your life goals, not just about your financial assets. Reviewing the three lever questions are really what monitoring and updating one’s financial plan should be about. Receiving ongoing advice on where you stand as it relates to YOUR Comfort Zone (750 to 900 lifetimes) and how to avoid the Sacrifice & Uncertainty Zones break the mold of traditional retirement planning.
