Evaluating a Retirement Plan
There are four steps to our retirement planning process:
Build --- Evaluate --- Implement --- Monitor
I'm focusing here on evaluating your retirement plan. There are five critical pieces of information:
1) When you want to "retire." "Retire" is in quotes because you or your spouse may wish to continue working in a reduced capacity. But this is the date that we begin withdrawals from your nest egg.
2) How much is in your nest egg.
3) How it is invested. Frequently we can improve the likelihood of success of your plan simply by making adjustments to your portfolio.
4) How much is your retirement income. This encompasses Social Security and any pension or trust income.
5) What are the expenses that fund your lifestyle. This is critical. There is only one reliable way to get that number and that is with good financial management software such as Quicken. These expenses increase with inflation.
In other words, when do you want to retire, how much do you plan to spend, and what resources do you have to make it happen? For a couple, we plan on one of the two partners living to age 93, and we assume a reasonable inflation rate. Please see this life expectancy chart, courtesy of JP Morgan, for an idea of how long you will live.
Click here for larger view of above chart.
For example, say you want to retire at age 65, have $500K saved, and plan on spending $80K/year and receiving $50K in Social Security. Since your Social Security income will keep up with inflation, you have a $30K shortfall, which will increase with inflation. Will your $500K portfolio last into your nineties when you are taking $30K/year or more out?
In order to assist you with your retirement planning we utilize MoneyGuidePro� from PIEtech, Inc., goal-based financial advising software, to prepare and analyze your retirement goals. MoneyGuidePro� tests your plan in three ways:
- Average rate of return. This is the simplest and least useful.
- Bad timing. Here MoneyGuidePro� assumes you retire at a bad time, where the stock market drops 20% shortly after you "retire."
- Monte Carlo Simulation. This is a sophisticated statistical technique that simulates hypothetical returns in the markets according to historical returns of your portfolio, and comes up with a probability of success.
See this MoneyGuidePro� chart. 
�PIEtech, Inc. Reproduced with permission. All rights reserved.
Here you start with $1M and draw down $50K/year over the rest of your life. Each green or red line represents a trial. One line shows very good returns in the stock and bond markets, in which case you die with over $20M. Other lines, in red, reflect poor returns and show you running out of money in 2035. In this case, you have a "score" of 82, which indicates that the plan will be successful 82% of the time.This is for illustrative purposes only and may not be indicative of your specific situation. Your results will vary.
It would be better if we could plan for 100% likelihood of success. Of course, we can do this by changing the variables. Assuming the resources are fixed, you can either spend less or retire later.
When do you leave for the airport?
We like to use the analogy of what time to get to the airport for a 10 a.m. flight when you've been told to arrive at 8:00. If you want to be 100% sure you won't miss your flight, you could arrive the night before and maybe even sleep at the gate. At the other extreme, you could assume there will be no traffic and leave just in time. But this would significantly decrease the likelihood of success -- perhaps below 70%. We get to know our clients and help them come to a number that allows them to live the best life they can with the resources at their disposal.
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Thomas Phelps DeVol is the founder of DeVol Insurance & Financial Services. He enjoys helping people transform their hopes about the future into attainable retirement plans. His persistence, know-how and diligence are the keys to his success -- and that of his clients.
Tom has three children and lives with his wife, Connie, and their youngest child in Newton, Massachusetts. He enjoys gardening, tennis, biking and opera.
Tom can be reached at 617-964-6404 or via email.
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Securities offered through Parkland Securities, LLC. Member FINRA/SIPC. Investment advisory services offered through Sigma Planning Corporation, a registered investment advisor. DeVol Insurance & Financial Services is independent of Parkland Securities, LLC and SPC.
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