retirement issues chapter 11 tools & techniques of financial planning copyright 2007, the...

Retirement Issues Chapter 11Tools & Techniques of

Financial Planning

Copyright 2007, The National Underwriter Company 1

Retirement Planning

• Not having to work anymore is a dream for many families – but what takes the place of a paycheck?

• Retirement planning, therefore, is essentially the process of making sure there will be enough assets accumulated that workers can afford to stop working at a given age and still live their desired lifestyle for the rest of their lives.


Financial Planning


When and How Should We Start?

• Retirement planning should start at the latest 15-20 years before the desired retirement age.

• Prior to age 30, the most that can be expected is a contribution to an IRA or a company plan.

• Anytime there is an employer match, a person should contribute to the plan whatever is required to get the maximum match.

• After age 30-35, people enter their peak earning years and can afford to contribute.

• Young couples often make the mistake of planning for children’s education and putting off their own retirement funding.


Financial Planning


Greatest Accumulation of Assets is After Age 40Because accumulation will take such a long time, assumptions are necessary and must be periodically revised.


Financial Planning


Key Statistics About Retirement

• Average retiree lives 20-25 years after retirement.

• Fewer business are offering company-funded pensions – thus it is more important to start saving early and to save a large percentage of earnings.

• Social Security benefits start at the earliest at age 62, at a substantially reduced rate. Yet most workers will have retired before that age, oftentimes by forced retirement.

• The savings rate in the U. S. is only 3% of income.


Financial Planning


How Does the Retirement Planning Process Work?

The retirement planning process is analogous to the financial planning process.

– Step 1: Evaluate the current situation (Gather data, including goals, and determine where the client is in the process.)

– Step 2: Determine retirement needs (Analyze and evaluate client status vis-à-vis future need)

– Step 3: Getting to retirement • Develop retirement investment alternatives and present to the client.

• Implement the chosen strategies.

• Monitor the chosen strategies to see if client is on track to reach his or her goal.


Financial Planning


Sensitivity of Assumptions

• Retirement planning typically involves long-range assumptions

• Small errors in assumptions can result in a client not having enough for the retirement he or she envisioned

• For safety, projections ofinflation and return on investment have to bemonitored carefully.


Financial Planning


Impact of Volatility

• An error often made is to assume a flat rate of return on investment.

• However, the reality is that returns fluctuate.• The withdrawal rate in

retirement cannot be as high as the average rate of return or the client will run out of money.


Financial Planning


Further Reading

• See these articles for a more in-depth discussion:– Evensky, H. (2005). The future ain't what it used to be. Journal

of Financial Service Professionals, 59(1), 16-18.

– Guyton, J. T. (2004). Decision rules and portfolio management for retirees: Is the 'safe' initial withdrawal rate too safe? Journal of Financial Planning, 17(10), 54-62.

– Opiela, N. (2004). Retirement distributions: Creating a limitless income stream for an 'unknowable longevity'. Journal of Financial Planning, 17(2), 36-41.

– Tezel, A. (2004). Sustainable retirement withdrawals. Journal of Financial Planning, 17(7), 52-57.


Financial Planning


Gathering Data and Identifying Goals

• As in all financial planning, the more that you can know about the client, the client’s financial status and their values and aspirations, the better job you can do of planning.

• Note how the following retirement planning worksheet helps you make sure that you know all pertinent facts.

• One major thing is missing from this worksheet – a qualitative narrative of what the client envisions his or her lifestyle to be in retirement. Asking the client to write out answers to questions about their retirement vision can assist the planner in making quantitative suggestions.


Financial Planning


Basic Identifying Information


Financial Planning


Collecting Information on Assets


Financial Planning


More Asset InformationNote that even this seemingly rather detailed worksheet does not give you all the information that you will need – for example, for CDs you will want to know the interest rate and maturity. You will also want to have details of the equities and bonds held. This is just a start.


Financial Planning


Personal Assets & LiabilitiesPersonal Assets are sometimes called “Use Assets.” The only way that their value becomes available to provide retirement income is by a change of lifestyle or by borrowing against their value. To live in the same style in the same area in a personal residence, you will have to pay about the same amount.


Financial Planning


BudgetInformationWhile most people will be able to give you the details of their investment assets, most have never confronted the costs of day-to-day living. Since they don’t know what it costs now, they have no idea what it will cost in retirement.


Financial Planning


Summary Balance SheetSubtract total liabilities from total assets to get net worth. Most planners will then subtract the value of use assets from net worth to get assets available for retirement. Note that education funds for children should not be counted in retirement assets.

Use this area to compute Assets Available for Retirement.


Financial Planning


Qualitative Questions to Ask About Retirement

Twofold purpose to the Vision:• Find out what is really

important to the client.• Let couples see that they

have different ideas about the ideal retirement.


Financial Planning


The Near-Term or Troubled Retirement

• Sometimes people get close to time to retire and go into a panic because they suddenly realize they have not saved enough.

• At this point, serious decisions have to be made:– Downsize housing?– What kind of health care

provisions can they make? Is there long term care insurance?

– What are the choices for pensions and Social Security?

• Oftentimes, people are working in retirement not because they want to work, but because they must. Methods for avoiding this problem

will be covered in more detail in Chapter 29

retirement issues chapter 11 tools & techniques of financial planning copyright 2007, the...

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