The Wealth Chronicle

A married couple (Joe and Lisa) in their mid 50's are planning for retirement in the next 10-15 years. They have taken large losses in their portfolio over the past 18 months and are interested in:

What type of standard of living will they be able to maintain throughout their retired years?
Are they going to retire when they want to, or will they have to work longer?
Do they have the right asset allocation plan in place between stocks, bonds, cash, real estate, and other asset classes?

Planning Process:
Joe and Lisa's situation is a common one that I have been working with lately. Most likely it is due to the fact that many investors portfolios have suffered monumental losses the past year and a half and people are truly concerned as to what those loses actually mean to their future. A fear that a lot of people have is outliving their money. The only way to really get a handle on what your financial picture will be during retirement is to do an analysis and put a plan together. This is something that Joe, Lisa, and I did together.

The first step of the process was to sit down with Joe and Lisa and take an snapshot of their current financial picture including their current assets. They were a little hesitant about sharing their personal information, but were happy to see that I have a Privacy Policy document that I am required to share with anyone I work with. The Privacy Policy states that your information is private and is not shared with anyone outside of Bautis Financial and the software that is used for Financial Planning.
After we took a snapshot of their current financial situation we started to discuss Joe and Lisa's goals for retirement. A subset of the questions that came up included:

� How much money Joe and Lisa thought they would need throughout their retirement years? It is hard to pinpoint an exact amount, but it could be a percentage of what their current salaries are, a number based on what their current expenses are, or any other number they think is pertinent.

� What timeframe were they looking to retire in? Whether they want to retire at 60, 65, or 70 makes a difference in how we created the plan.

� How much risk they are willing to take on their investments? You should never take on too much risk that you have trouble sleeping at night.

� How long did they expect that money to last? Do they plan on passing any money onto their heirs?

� Do they have anything special they plan to do during retirement that could impact them financially? Examples of special plans could include helping fund their grandchildren's education, traveling around the world, or buying a vacation home.

The next step was to do the actual analysis and create the plan. I use an "Industrial Strength" Financial Planning software tool called Naviplan. Using Naviplan I was able to calculate Joe and Lisa's cash flow and net worth statements. By plugging in all of their investment information we discussed in Step 1 above, I also did an analysis on their assets and proposed a change to their current investments. The changes I suggested were designed to give them a better asset allocation mix and to lower the fees and expenses they were paying on some of their investments.

Asset Allocation Mix
When it comes to making money with investments, your asset allocation mix is the most critical factor on what your returns will be. There are three ways to make money with your investments:

Asset Allocation
Market Timing
Security Picking

A study was done that concluded that 90% of your actual return depends on your asset allocation (your breakdown of different classes of investments, stocks, bonds, cash, cd's, real estate, commodities, and other asset classes) Market Timing (Taking your money in and out of the market) and Security Picking (I think IBM is a good buy at $45) only account for 5% each of your overall portfolio returns. The results of the study highlight the importance of paying attention to your asset allocation.

Joe and Lisa's current asset allocation looked like this:

The above chart looks like it is split into six almost equal pie slices, giving the impression that Joe and Lisa did a good job at diversifying. This allocation may have been the right mix for some people, but for Joe and Lisa's current situation there are a couple of issues with it:

Having almost 65% of their portfolio invested in equities is too aggressive a portfolio, especially for a couple approaching 60 years old looking to retire in a couple of years. Couple this with the fact that Joe and Lisa are conservative when it comes to taking risk and this was definitely the wrong mix. Their money needs to last them 30+ years, so it is necessary to have some investment in equities, but just not the large percentage that they currently have
They are not properly diversified across enough asset classes. The goal of having a truly diversified portfolio is to smooth out your returns over time while maintaining or even lessening the amount of risk that you take on. By having most of their investments across Large Cap Value Stocks, Small-Cap Growth Stocks, Fixed Income, and Cash, they are missing out on a large suite of asset classes, mainly:

� Large Cap Growth Stocks

� Mid Cap Stocks

� International Stocks

� Emerging Market Stocks

� Long-Term Corporate Bonds

� Short-Term Corporate Bonds

� Municipal Bonds

� REITs (Real Estate Investment Funds)

� Government Securities

� Commodities

� Inflation Protected Securities

Taking the above two points into consideration we came up with the following recommend asset allocation mix:

By putting the above asset allocation plan in place we were able to lessen the risk on their overall portfolio with the goal of maintain the same returns,

Investment Fees

The next thing we looked at were the Fees they were paying on their investments. The mutual fund industry has managed to do a great job of hiding how much an investor has to pay each year to invest in a mutual fund. The disclosure rules have gotten better the past couple of years, but the average investor is often amazed when I show them what they are paying for each fund they invest in.

The following is an example of a mutual fund that Joe and Lisa were invested in and the expenses and fees they paid each year to own that fund:

� Morgan Stanley Balanced Fund Class C - Annual Expense: 1.79%, 1% charge if you sell less than a year of owning the fund

This means that each year Joe and Lisa will pay 1.79% of the amount of money they have invested in this fund as an expense. They do not get a bill for this expense; the money is automatically deducted from their account. That 1.79% pays for the fund manager, any legal fees the fund incurs, advertising the fund, shareholder costs. To top it off if you sell the fund before a years timeframe, you will pay a 1% charge. Some funds will even have you pay a Sales charge up to 5% upon purchasing a fund.

I recommended Joe and Lisa changing their investments to utilize funds with lower expenses. The funds I recommended all ranged from having expenses of .15% to .25%. The good thing about these lower expense funds is that historically they have produced just as good if not better returns than the higher priced funds that Joe and Lisa are currently invested in. I cannot think of a reason to ever invest in a fund that imposes a sales charge. While low fees are not the only reason to select an investment it is worth noting that the money saved on their investment fees more than paid for my fee as their investment advisor.

Standard of Living throughout Retirement

Finally, we started getting into the retirement planning modules and determined how much money they would have each year of their retirement and how things like Social Security, inflation, and taxes would impact their financial situation.

Even though Joe and Lisa have taken a large hit with their investments during the past 18 months they have been diligent savers over their lives and most likely will achieve their retirement goal of being able to maintain the same lifestyle throughout retirement. I generated a few reports to show them how different scenarios would impact their retirement. These would be extremely useful if someone was not going to be able to achieve their goals and they had to modify their plan slightly.

Scenarios:

1) Work Longer - currently Joe and Lisa have stated that they wish to retire when they each turn 63. By working 2 more years each they can drastically enhance the amount of money they will have for retirement

2) Save additional money each month up until their retirement. Currently Joe and Lisa are saving 6% of their monthly income. If they could increase that to 10% for the next 5 years until they retire that will improve their retirement situation

3) Save a lump sum of money. This is a common option that confuses most investors. They say where would I get a lump sum of money from to invest now. The most common place that retirees get this lump sum is by downsizing their house

3) Modify their asset mix to increase the risk in hopes of achieving higher returns. The asset allocation mix that we put forth above is the right mix for Joe and Lisa's situation. An option we have though is increasing the returns of the portfolio by increasing the risk we take with some of the investments. If the markets turn out good the next couple of year then Joe and Lisa will have additional income, however if the markets do not have a good 5 years, Joe and Lisa will have less money during retirement.

4) Work part-time during retirement. Psychologically it's hard going from working 40+ hours a week to not working at all. Some people consider working part-time to keep themselves busy. The positive by-product of this is that it increases your income.

6) Cut back their proposed spending during retirement (A lot of people overestimate the amount of money that they need during their retirement years, especially as they get older and approach their 80's and 90's.

Some of the options above, like working an extra couple of years are not preferable, but it is better to see now that you have 6-7 options should it appear that you are going to fall short of your retirement goals rather than going at blind and hoping for the best. I try not to overuse the acronym Y-O-Y-O, but it really is a "You're On Your Own" environment and it is never too early to work out a retirement plan to ensure you are on the right path.

By going through a planning session, Joe and Lisa now have an idea of what type of financial picture they are looking at during retirement. Some things will change over the next 10 years before they retire, which is why we put a process in place for me to review their plan with them every 6 months to a year.