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The Key to Successful Retirement Planning

Flexibility should be the watchword when it comes to future finances.

Dan Danford, 02/28/2008

The post-World War II baby boom is becoming a post-millennium retirement boom.

This is a critical social and financial point. Many people gather retirement information from trusted friends who've already done it, and that can be a disastrous mistake. Grandma and grandpa put all their savings in bank certificates of deposit, and that was probably okay when the typical retirement lasted five to 10 years. Today's retiree faces a completely different challenge and a broad array of new investment products and ideas.

The prevailing theme for future retirement planning should be flexibility.

To illustrate, think back on the past 30 years of your life. How much change have you endured? Family. Friends. Profession. Geography. Technology. Would you be content living on the same salary you earned in 1978? The same car? The same house? Now look to 2038. Are you willing to lock in financial solutions today? Even the very best products in today's marketplace are likely to evolve/improve dramatically over the next 30 years.

It strikes me that many baby-boomers seek a concrete "answer" to their retirement issues. They want questionnaires, spreadsheets, calculators, and--finally--a specific number or solution for their own situation.

It's especially fascinating because these tools are readily available. These are the tools of financial planning and most of them can be found on any good financial Web site and/or a local library. Competent advisors can prepare an extremely detailed report on these exact and other related issues. It's not rocket science, and it's not a secret technology. But, it's also not a concrete solution.

Most people don't fully appreciate the complexity involved, and, therefore, the folly of concrete answers.

First of all, there are at least three huge retirement questions without accurate data:

1) How long a specific individual will live.
2) The precise future performance of investments.
3) The precise future rate of monetary inflation.

Truthfully, these key points are monumental mathematical factors for determining anyone's "number" and yet they simply can't be known in advance. Any decent model will make assumptions about these three that impair the final results. Add to these three the countless variables for each unique circumstance (including lifestyle and other important factors) and the entire process grows necessarily vague. Almost any process that yields a concrete number is dangerously flawed. Almost any plan that yields a concrete solution is, likewise, dangerously flawed.

Perhaps a better way to say this is that, while it's possible to recreate an exact "number" upon a person's date of death (by looking backward), it's impossible to accurately devise this same number before that date.

Interestingly, this vagueness is at a peak as a person approaches retirement. People in their 50s and 60s must look toward two or three decades of potential lifespan. Small variances in investment performance or inflation compound to make a huge difference over these lengthy periods, so uncertainty plagues early planning. With each passing year, we replace one year's financial estimates with hard (though historical) data. We also bring more certainty to the "lifespan" question (from x to x minus 1). Each year into retirement brings greater certainty to each circumstance.

A recent national ad for annuities offered "A promise of a never-ending paycheck for all your retirement days." Other insurance companies are gearing up for tremendous boomer demand. Yet, though fixed annuities may end up being quite popular, I doubt they are a good long-term solution for most baby boomers. (At best, they may be part of a good long-term solution.)

Surely, there will be more creative products and solutions as this retirement boom explodes. Right now, though, I'm seeing a lot of traditional providers adopting a "classic rock" theme for presenting the same tired old products (Dennis Weaver, anyone?). I fear that some consumers will make irrevocable choices and then suffer long-term consequences. That's why I'm preaching the gospel of retirement flexibility!

Of course, there's also a powerful argument for a broadly diversified portfolio. If a portfolio holds 50% stocks and 50% bonds, and the stock market falls by 30%, that portfolio only drops 15%. Probably less if you diversify properly among cap size and sectors. The beauty behind Modern Portfolio Theory is that you can lower risks - sometimes substantially - without disrupting performance. Today's broad palette of no-load funds, ETFs, and other low-cost alternatives offers a variety of ways to build and maintain a solid, long-term, retirement portfolio--with a high degree of future flexibility.

My usual suggestion is to diversify the retirement portfolio using low-cost mutual funds, then ignore most stock market fluctuations. Most insurance or guarantees against market decline come at a very high price, and market setbacks end up being temporary, anyway. Occasionally, these might make sense for someone in retirement or especially nervous. But, for younger retirees, you give up way too much for what you get.

From all this, my conclusion is that the important retirement numbers change throughout life, and actually become more certain in the furthest years of retirement. People seeking a concrete answer are advised to revisit this subject often, and to make frequent adjustments.

As a professional, two things seem very clear: First, flexibility is a prime issue in achieving retirement success. The longer the likely time horizon, the more call for future adjustments (and the need for financial flexibility to make those adjustments). Second, ongoing evaluation is critically important. A one-time retirement "plan" isn't likely to yield lasting results. Any successful plan will require frequent revisions.

These many complications will drive some people crazy. It's not that advisors don't address them; it's that no advisor can fully address them. Retirement is not a one-time thing. It will require ongoing evaluation and flexibility for several decades. That's a very important point. Flexibility is the key to successful retirement planning.

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