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Sometimes, it’s what the teacher learns from his students,
rather than the other way around.
I’ll explain. I’m currently teaching an online course at Boston University
about retirement. The students are working professionals from around the world,
including Australia. Some are researchers, some financial advisers and some are
working in the home office of big financial firms. More often than not, I’m finding that I learn a thing or two about retirement that can be more than a little helpful to my readers. Here’s an example: Four simple but essential steps to creating the complete retirement plan.
Getting the right mix of assets, products and withdrawal strategy
Advisers are increasingly using software programs such as MoneyGuidePro and Income Discovery rather than pencil, paper and calculator to build retirement-income plans. And with good reason. These and other sophisticated software programs are taking much of the guesswork out of retirement planning.With Income Discovery, for instance, advisers such as Rick Fine of Sensible Financial Planning will enter information about your three main types of capital: human (your earnings from work), social (Social Security) and financial capital (your taxable and tax-deferred accounts) into the program. In addition, advisers will enter information about your current and future expenses.
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income for life Part of this exercise also involves assessing whether you are willing to purchase income annuities to make sure your future expenses are covered, as well as getting a handle on your tolerance for risk, expected rates of return and the like.
Add that all together and the software will figure out the optimal combination of annuities for you to buy, how much to invest in your maturity-matched portfolio, and a systematic withdrawal plan (SWP) that will lead to a successful outcome, said Fine.
According to Fine, the cash flows generated are for the least successful of all possible successful outcomes. What’s more, the program also shows the failure rate, annuity purchases as percent of total assets, and maturity-matched portfolio as a percent of income.
For the maturity-matched portion of your portfolio, the Income Discovery program actually shows specific bond purchases right down to the individual CUSIP number of the security, the month and year of maturity, the number of bonds purchased, and total value, “so that we can actually implement the plan by requesting specific bonds through YieldQuest, or some similar company,” Fine said.
Manish Malhotra, the brainchild behind Income Discovery and a MarketWatch RetireMentor , said the maturity-matched portfolio can be used to create a cash flow to match any type of expenses in retirement. “Its simplest use is to fill in for the cash flow that Social Security could have provided, if not deferred. By building a TIPS based ladder in such a case, one would be able to get the U.S. Government guaranteed cash flow for part of one’s income, while still taking advantage of the higher Social Security benefit amount obtained on deferral of the claim.
Another use of the ladder, he said, is to provide cash flow to cover either all expenses or essential expenses if the investor is willing to reduce nonessential expenses under unfavorable market conditions. “The period of coverage would depend on the investor’s age, risk attitude and current bond yields,” he said. “A conservative investor may decide to lock in 10 to 15 years of expenses, while an investor with higher risk profile may lock in only three years of expenses. Low yields, like current yields, will further reduce the period length. “
Read “Bond Ladder—A Source of Certain Cash Flow,” an article on Income Discovery’s website which explains the bond ladder and its advantages over holding a bond-based mutual fund for generating the desired cash flow.
The lesson? Gone are the days when you can just wing it in retirement. Today, more than ever before, you have an opportunity to create the most optimized stream of income in retirement. Don’t leave your precious hard-earned money on the table. Take advantage of the software available and the experts who get retirement-income planning.
Getting retirement expenses right
Getting a handle on what your expenses will be in retirement is a big part of getting your retirement-income plan right. But according to Fine that is sometimes harder than it sounds.“We sometimes have difficulty obtaining a ‘current’ consumption budget from clients who do not track their expenses very well (or not at all),” he said. “Since we do consumption-based planning, we need to know what clients spend in a typical year. It’s not so much that they don’t want to give us the information, it is more that they are unable to account for a lot of their expenses, so whatever they give us will most likely be wildly off.”
In some cases, Fine reports having to “back into” annual consumption spending. “Although not as accurate as we would like, we do this by asking them how much they earned last year, and how much they saved to various accounts,” he said. “But if we have a base level knowledge of what came in and what was saved, we can form a rough estimate of what was spent.”
In the main, however, Fine said, more people than he would have expected are able to account for a year’s worth of spending. “Often, they do the brute force method of poring over their credit card and checking account statements, but they get it done,” he said. “Others are more sophisticated, using Quicken or mint.com to track spending.
Whatever you do or don’t do, the lesson here is clear: If you don’t know what your expenses are or will be in retirement, how will you ever know how much income you’ll need in retirement?
Maximize your income
Besides getting a handle on your expenses, you’ll need to figure out ways to maximize and optimize your income in retirement. Now, the most common ways to do this are well known: You can, for instance, keep working, get another job at a higher salary, or ask your non-working spouse to re-enter the workforce.But in some cases, if you have this option, consider buying a higher pension benefit while you are still employed. Public employees who have a defined benefit pension plan might have this option, for instance. “If you live long enough, it eventually pays off,” said Fine.
Others agree. “I think purchasing pension credit is the best way—besides delaying Social Security until age 70—to immunize your income to cover fixed expenses if between Social Security and pension more lifetime income is needed,” said Betty Meredith, the director of education and research for the International Foundation for Retirement Education.
According to Meredith, buying pension credit provides funds managed by the same level of professionals who manage insurance and mutual fund companies and an institutionally priced annuity with a savings of probably at least one-third since marketing costs are nonexistent which means more income in their pocket over time.
The lesson? In retirement, when every bit of income is precious, look for ways to create the most amount of income where and when possible.
Reaching an agreement
One of the big problems awaiting couples on the verge of or even in retirement is this: They seldom have talked about what they want to do in retirement, about their goals, travel plans, and the like. So to solve this problem, David Evensky of Evensky & Katz uses MoneyGuidePro (MGP), which is a goals-based capital needs analysis software.“MGP is quite savvy in understanding human behavior and the problems advisers must deal with in truly assessing our client’s objectives,” Evensky said.
For instance, MGP has created some cards that advisers use with their clients. The cards have certain goals listed on them and pictures to help those who visualize concepts easier than hearing them. These cards have typical retirement goals such as travel, gifts/donations, college, home improvement, major purchase, and basic living expenses.
“We have each spouse take their cards and prioritize them,” Evensky said. “We then help each one discuss together why they made a choice and what that means to them. Very often just having this conversation honestly and openly really speeds up or planning process and helps each adviser and team understand the goals and objectives most important.”
“Maximizing returns is not always the priority,” said Evensky.
Rather, he said the lesson is this: Giving people the peace of mind that they are on the path to what’s most important to them in retirement and maximizing the probability that they will be able to realize these goals is the priority.
Robert Powell is editor of Retirement Weekly,
published by MarketWatch. Learn
more about Retirement Weekly here . Follow his tweets at RJPIII .
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