Jan 24, 2023
Planning for retirement in an uncertain world
If you’re newly retired or approaching retirement, you should be proud of your accomplishments! You’ve worked hard for many years and have likely saved diligently. Now you can focus on your hobbies, goals, family and just about anything other than working.
However, this time can also be stressful and uncertain, even in the best of market conditions. During periods of high market volatility, that stress is understandably magnified. You may find yourself wondering, “Do I need to work longer?” or “Do I need to return to work?”
While everyone’s situation is unique, here are a few concepts to keep in mind when speaking to your financial advisor about your retirement plan.
1. Don’t rely on rules of thumb when planning for retirement
One of the best-known guidelines for retirement planning is the “4% rule,” derived from a seminal study by William Bengen in the October 1994 edition of the Journal of Financial Planning.
In the study, Bengen tested various withdrawal rates and asset allocations at the start of retirement, with adjustments for inflation from 1926 through 1976. The author concluded that an initial withdrawal rate of 4% in a portfolio composed of 50% stocks and 50% bonds would have lasted at least 35 years in every scenario that was considered.
The 4% rule is certainly a place to start when considering your retirement spending ability, but it’s just that: a start. We recommend always working with a certified financial planning professional to review your specific situation. At CI Private Wealth, we take a much more rigorous approach to determining a financial plan’s probability of success with the primary goal of giving retirees peace of mind, even in times of market stress.
2. Make sure your portfolio has been run through stress tests
In our view, rules of thumb and averages certainly help to provide a solid framework around decisions, but they generally lack the deep analysis necessary for success.
For example, you would likely feel very confident in planning a beach outing in San Diego in July, anticipating sun and warm weather. However, in reality, it’s impossible to know if the weekend you pick will be sunny or cloudy or if something out of the ordinary will derail those plans.
Retirement planning is much the same. To try to account for the variability of reality, it’s helpful to stress test a portfolio through Monte Carlo simulations. The Monte Carlo planning method factors in the randomness of portfolio returns (good and bad) by evaluating the sustainability of your retirement goals through 1,000 variations of portfolio returns, producing a “probability of success.”
Sample Monte Carlo Simulation
(Note: “Failures” are defined as scenarios in which portfolio assets are depleted prior to the end of the plan.)
With a better understanding of the likelihood of success, a financial planner can explore strategies, actions and adjustments that can help you achieve your retirement goals.
3. Have the “what-if” conversation
Whether you’re still preparing for retirement or currently retired, your goals will likely change. This is why having the “what-if” conversation with your financial advisor is important when considering goals like:
- “What if we want to purchase a second vacation home?”
- “What if I want to give more to my favorite charitable organization?”
- “What if we want to help our grandchildren pay for college?
We believe an excellent advisor should not only be aiming to protect your nest egg for the probable and the likely, but also the unlikely. While you focus on the enjoyable “what-ifs,” your advisor can guide you through the tough decisions that may impact your plan’s success.
Considerations for financial planning
Wherever you are on your path to retirement (or even if you are well into it), completing a financial plan is likely a valuable and necessary step to ensure you are on track. At CI, we believe your retirement plan should only have to change when your goals change—not when the market does.
If any of the three following situations apply to you, it may be time to complete or revise your current financial plan:
- If your goals or personal life situation have changed since your last plan
- If your previous plan did not use Monte Carlo analysis and/or lacked the rigor of stress testing your portfolio against various market conditions
- If you walked away from a meeting with your financial advisor confused about your budget, portfolio risk level or Social Security claiming strategies
If you’d like to learn more about CI Private Wealth’s approach to financial planning, please do not hesitate to reach out. Our mission, as advisors, is to help our clients walk away with a clear and concise understanding of where they currently are in their financial journey and the “levers” available that will have the greatest impact on them reaching their retirement goals. We welcome the opportunity to speak to you about our services.
ABOUT THE AUTHOR
Anna Diaz
Anna joined Dowling & Yahnke Wealth Advisors in 2018. Prior to joining Dowling & Yahnke, she was a Senior Vice President and Private Client Advisor at a national private wealth advisory institution for 16 years. Anna holds the CERTIFIED FINANCIAL PLANNER (CFP), Certified Private Wealth Advisor (CPWA), and Certified Exit Planning Advisor (CEPA) designations. She also holds a Certificate in Investment Strategies and Portfolio Management from Wharton. Anna completed her undergraduate work in Financial Services at San Diego State University. Anna was born and raised in San Diego. In her spare time, she enjoys time with her family, her Peloton, and reading. Anna lives in Carmel Valley with her husband and their two children.
Erik Nelson
Erik joined Dowling & Yahnke in 2019 as a Financial Planner and now is the firm's Director of Financial Planning. He manages the financial planning team and serves as a technical leader for complex planning issues and initiatives. Prior to joining Dowling & Yahnke, he served in financial planning and advisory roles over the last five years with two local investment management firms in San Diego.
Erik holds a CERTIFIED FINANCIAL PLANNER (CFP) designation and Certified Private Wealth Advisor (CPWA) certification. He has a Master of Science in Business Administration (MsBA) in Financial & Tax Planning from San Diego State University. Erik completed his undergraduate work in Business Administration and Finance at San Diego State University.
Erik is a native San Diegan who currently resides in La Jolla and is an avid sports fan.
CONTENT DISCLOSURE
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. The future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable or suitable or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees that would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
Advisory services are offered through CI Private Wealth and its affiliates, each being a registered investment adviser (“RIA”) regulated by the U.S. Securities and Exchange Commission (“SEC”). The advisory services are only offered in jurisdictions where the RIA is appropriately registered. The use of the term “registered” does not imply any particular level of skill or training and does not imply any approval by the SEC. For a complete discussion of the scope of advisory services offered, fees, and other disclosures, please review the RIA’s Disclosure Brochure (Form ADV Part 2A) and Form CRS, available upon request from the RIA and online at https://adviserinfo.sec.gov/. We also encourage you to review the RIA’s Privacy Policy and Code of Ethics, which are available upon request.
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