How to make sure your financial plan aligns with your personal priorities.
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By Christine Benz | 05-14-09 | 06:00 AM | Email Article

Ross Levin, founding principal of Minneapolis-based Accredited Investors and one of the top financial planners in the United States, understands that successful investing depends as much upon understanding his clients' personal needs and goals as it does on selecting appropriate investments for their portfolios. To help discuss the recent financial crisis and its impact on how individual investors should be managing their portfolios, I recently sat down with Ross for an interview. 

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

A complete version of the interview appears in my newsletter,Morningstar PracticalFinance.

Christine Benz: Many pre-retirees have been dealt a huge blow. How would you counsel them?

Ross Levin: Our guiding philosophy for those who are retiring is that once you're living off your portfolio, you need to have three years' worth of spending in cash or cashlike instruments. So if you're very close to retirement, you might have thought that, "Once I retire I'll raise the cash." For those people, it may make sense to put the monthly money that's going into the 401(k) into a risk-free option rather than raising cash in this environment. If they're three years away from retirement and they're putting maximum money into the 401(k), they may be able to raise $40,000, $60,000, or $80,000 in cash over the next few years; that would allow the rest of the portfolio to do what it needs to do to build back.

The key thing for everyone who's thinking about retirement is where are the sources of income going to come from. And there have been a couple of misconceptions that have affected retirees. One is that they thought that their home was going to be a great source of money. What we've found from our clients, and our clients are a little bit more affluent, is that when they retire, almost none of them have "bought down." They've either stayed in their homes longer than they thought they would or they've bought an equivalent place, and even though it's smaller they're not saving that much money on the buy.

The other thing that people misperceive is what their retirement is going to look like. Most people, and especially after this market, are going to either work a little bit longer or find a way to earn a little bit of money in retirement. And that is so significant. If you use a spending policy and let's say you spend 5% of your assets in retirement, and you could make $20,000 working, that's equivalent to having $400,000 of investment assets.

We also love to see those who are in the pre-retirement phase pay off their mortgages, even with interest rates as low as they are. The reason is that we're trying to drive down cash flow, or fixed costs, as much as we can because that creates the most flexibility for people. And what we have found in retirement is that clients need to be flexible because no matter how good your planning is, when clients feel poor, they don't spend as much money, and when they feel rich, they spend more than they're supposed to be spending. So you really want to manage the fixed costs. If the clients' fixed costs are low, then you can encourage them to do things that matter, like take vacations and visit the kids while they still have their health.

Benz: What advice do you have for those who are already retired?

Levin: I've been doing this since 1982, and I will say that not one of my clients' retirements looked the way they thought it was going to look. They lived longer than they thought, they lived shorter than they thought, they were healthier than they thought, they were less healthy than they thought they would be. Almost all of our clients died with too much money. One thing that we've been experiencing a lot lately is one healthy spouse and another spouse has Alzheimer's or ALS or something along those lines. That changes everything for everyone.

The other thing that we've noticed is that clients who are retired may not notice all the sources of investments they have. For example, we have clients who own a home up in Minnesota and a home down in Florida or Arizona. Once they are retired, they choose to only live in one place versus the other--maybe not right away but when they're 75 or 78. So suddenly we sell a home and those proceeds end up coming into the portfolio and that buys us time. One of the things that is really important for those who are retired is to recognize that your picture changes all the time. And again, it's one of the key reasons we stress flexibility.

So right now, immediate annuities are being bandied about in this kind of environment. And we're not big fans of immediate annuities because they are an answer to only two questions: How do I get the most income right now from my portfolio and how do I know that I will always have some income? While these are important considerations, there are many other things to think about. There are so many different things that can change during retirement. So we're big fans of making sure we stay flexible and we're also big fans of having experiences in the early years of retirement, because none of our clients, except for health-care expenditures, end up spending more in their 80s than they did in their 60s or 70s.

Of all the products that are out there, the one that's most intriguing to me is longevity insurance, which is not really good yet. But that's where you put some money away and it doesn't pay off until you're 80, and then it creates an income stream from age 80 for the rest of your life. The advantage of that kind of product is that it allows you to do planning with the rest of your assets using a fixed time horizon. So the major question that all of us have is how long we will live, and longevity insurance allows you to not worry so much about that. For much less cost than an immediate annuity, you can lock in a future income stream, which we think is really intriguing.

The other thing that we've become much more appreciative of is long-term care coverage. For our wealthy clients, from a financial standpoint, long-term care often doesn't make sense, but we're finding clients who want to own the policies even if it doesn't make sense because it allows them to spend more of their assets on other things that are more important, because they know they won't have to rely on their assets for long-term care. So there are other reasons than financial why that kind of product can make sense.

Benz: You said that a lot of your clients died with too much money. How do you work against that?

Levin: The way we try to manage that is to ask, "What is it that you're spending your money on?" So when we see someone with too much money, we're not encouraging them to buy another Rolex. We're encouraging them to see whether there are things that are going to make a difference in their lives, things that they could have done with their money that they'll regret not doing.

So, for example, one of our clients, when they were 69, took their grown kids and their grandkids on a cruise together. The parents paid for it, and it was a big deal. And, by coincidence, unbeknownst to either of the parents, the mother was diagnosed with Alzheimer's about six months later. That cruise could not have happened at a different point in time.

Now they're worried about her care and what's going to happen, but that cruise got a tremendous amount of mileage for them. That experience with the whole family was such a wonderful thing, and should she pass away from Alzheimer's, the kids will always have that experience to talk about. If she passed away with another $50,000 in the bank, would that have been more significant than what they did with that money? 

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Morningstar - 2009/05/14 - A Top Planner Shares Tips for Retirees and Pre-Retirees - <a href="http://www.morningstar.com/articles/author/30-christine-benz.aspx">Christine Benz</a>
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