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Nearing Retirement? Make Your New Venture More Secure by Getting Financial Advice Now  

Here we discuss critical planning issues that are best addressed with a wealth planner well before you celebrate your last day at work. Develop a wealth plan that can be translated into a personal financial plan.

7 Minute Read

Retirement planning has become more challenging in recent years. Stock markets remain volatile and unpredictable, yet "safe" investments such as money market accounts and CDs have continued to offer relatively low short-term interest rates.

Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes. Investors planning for retirement have questions about how these factors will affect their retirement funds. Have I saved enough? What is a reasonable and sustainable withdrawal amount? Can I plan for retirement while also meeting other intermediate financial goals, such as educating children, paying off debt or making some improvements around the home?

These and other questions weigh heavily on the minds of most retirement investors. While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still pursue retirement security. But to do so, you may want to consider engaging the services of a financial planning expert. In fact, perhaps one of the most common reasons for people to begin financial planning is to build a retirement fund.

Countdown to retirement

Have you begun your countdown to retirement? If so, a financial advisor can help you make an efficient transition to the next stage of your financial life. Following are four critical areas to address with your advisor a few years before you expect to retire.

  1. Consider your retirement plan as the beginning (opening) chapter of your next (or new) life phase. Think about what is more significant and personally rewarding than money. Begin by discussing your dreams of what retirement could be. Do this with your spouse or significant other. Hopefully there is some overlap and consensus.  Next, transfer these dreams into specific written goals and try to prioritize these goals. This is an often-overlooked phase, but one that is critically important to the development of the financial structure that will help accomplish your goals and dreams.   
  2. The next step is to estimate what retirement will cost. Many people enter retirement without the slightest clue as to what they want to do with their time -- or whether they have enough money to do it. Will you continue to work part time? Travel? Maintain a second residence? Make improvements to your existing home? It’s important to plan how you'll allocate your time and resources -- because that decision will have a direct impact on how much retirement will cost you.
  3. Estimate the income and savings you can rely on during retirement. How much will you receive from Social Security, a company pension, 401(k) plan, or other employee-sponsored retirement accounts? Contact the Social Security Administration or your employer's retirement benefits representatives to obtain a statement of the estimated income from these sources. Confirm amounts in any other retirement plans, such as IRAs and personal investments. If your anticipated income does not equal or exceed your projected expenses, your financial advisor can guide you in developing a plan to bring these two into alignment.
  4. Arrive at a spending limit. Once you have a handle on expected income and expenses, calculate how much you can withdraw from your accounts each year without spending down your principal. Your advisor can create various withdrawal scenarios based on forecasted investment returns, inflation expectations, and other practical financial planning considerations.

Accounting for uncertainty

In the past, calculating annual withdrawal amounts was done by means of simple spreadsheet analysis. A planner would use historical performance averages to project future portfolio values and automatic calculations for variables such as inflation and life expectancy. The problem with this approach is that the lack of flexibility in the calculations makes it difficult to account for year-by-year variations in outcomes or changes in an individual's life or lifestyle that can affect underlying assumptions.

Fast forward to the present where sophisticated computer forecasting models, such as the Monte Carlo simulation, have become the preferred tools for dealing with the uncertainty surrounding retirement planning. When used in investment decision-making, the Monte Carlo simulation forecasts how a portfolio is likely to perform under thousands of possible scenarios based on a combination of parameters -- such as life expectancy, interest rates, equity returns, and inflation -- and modeled around a specific problem (e.g., How much can I accumulate for retirement?). Results are recorded and ordered according to which scenario is most likely to meet the investor's retirement goals.

With more attention being paid to retirement planning, forecasting tools based on the Monte Carlo simulation have enjoyed a renewed popularity in investment analysis. In an uncertain world, such tools can help provide confidence to investors by addressing some of the toughest retirement planning challenges. But remember, any forecasting tool, no matter how sophisticated, cannot predict the future. What's more, forecasts are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future performance. For this reason, you should think of forecasts as a starting point for regular discussions with your advisor as to how your retirement assets are performing to support your retirement goals -- not as your ultimate planning solution.


This information is not intended as legal or tax advice and should not be treated as such. You should contact your estate planning and/or tax professional to discuss your personal situation.  The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.


© 2020 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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Wealth planning strategies have legal, tax, accounting and other implications. Prior to implementing any wealth planning strategy, clients should consult their legal, tax, accounting and other advisers.