Retirement hovers out there like an
oasis. You can almost feel the excitement of travel, the relaxing hours on the golf course and ample quality time with
the grandchildren. But retirement’s not
cheap — you’ve got to pay to play.
“You could spend about 5 percent of your
retirement capital every year,” says David
Shiell, president, Financial Horizons LLC.
“When you do the math, that’s a pretty big
number to accumulate.”
Smart Business talked to Shiell about
how routinely assessing your retirement
needs and monitoring investment costs
and risks can help ease you into the retirement lifestyle you deserve.
What is the biggest flaw or omission you see
in retirement planning strategies?
The most common flaw is that people
underestimate what their financial needs
will be when they retire. A good estimate:
for $100,000 of yearly spending in retirement, you probably need about $2 million
of retirement capital. If you do the math,
we’re assuming that you could spend about
5 percent of your retirement nest egg every
year. That’s quite a sum to accumulate in
retirement, particularly out here on the
West Coast. We figure retirees are going to
need $3 or $4 million to have a comfortable
retirement. Many times we live month-to-month and we don’t really have a handle on
how much we’re actually spending.
What should be considered when determining retirement cash flow needs?
Most people in retirement are probably
spending a little more than they planned
upon, at least early on. Typically, there’s a
great interest in travel, and travel is a fairly
expensive proposition. As they grow older,
the spending ramps down.
Retirement cash flow planning really
becomes an exercise in math to a certain
extent. We work with future retirees to
analyze, for example, how much they have
accumulated in their savings plan so far,
their investing style, how they are investing
these assets, and then determine the
expected rate of return that might apply to
them. Once we know all of these factors,
there are calculations done that help guide
retirement cash flow planning. Investors can also tap a number of Web sites that
help with retirement cash flow planning.
What nuts-and-bolts investing practices can
help build retirement assets?
We try to get our clients focused on good,
basic investing strategies. One of the most
important aspects is to keep investing
costs down. Your return on investment is
net of whatever you are incurring in terms
of management fees, transaction costs and
even tax costs. Investors should make sure
they’re using funds, low-cost funds or perhaps exchange-traded funds. It’s important
to focus on the after-tax returns that mutual funds are passing out at the end of the
year and make sure, to the extent possible,
that gains and losses are matched to try to
minimize capital gains. In this area, index
funds can be used to minimize taxable
events in accounts.
Investors should also be diligent about
diversifying and rebalancing their portfolios from year to year. For example, a popular investment for the last five years has
been real estate investment trusts. They
had a great run with tremendous gains. But
because we don’t expect those returns to
be the same going forward, it’s likely that
this part of the portfolio needs to be rebalanced to bring it in line.
How do wills and estate documents come
into play?
It’s surprising how many clients come in
and have done nothing in the areas of wills
or trusts and documents like power of
attorney for health care. People don’t like
to think about these things — it’s planning
for a potentially bad event, and we tend to
shuffle these things off to the side. People
need to consult a recommended estate
attorney to implement a will that handles
concerns with children and financial matters and get those power of attorney documents completed. The attorney can also
help decide if a trust is appropriate for your
situation; certainly for larger estates, a living trust would make a lot of sense and can
lead to potential estate tax savings.
How can insurance protect retirement
assets?
It’s important to protect the income earner. The individual who is the primary
income earner in the family needs to have
a good life insurance policy and a disability
policy to maintain the income flows to the
family. That process involves evaluating
how much insurance is necessary: Is the
mortgage covered? Do we have several
years of income covered? Do we have college expenses for children covered?
People should put estate planning and
insurance on their to-do list and accomplish them at the same time.
How can busy executives monitor their retirement asset track?
It goes back to creating a retirement cash
flow planning document. It can be put
together in just a couple hours time with
the help of a financial planner or through
one of the brokerage Web sites. That retirement cash flow plan provides a model that
helps monitor your progress year-to-year
so you can say, ‘At age 53, I expected my
retirement assets to be there, and they’re
not. I may need to adjust my plan to meet
those goals.’ It’s a great tool to help determine where you are in terms of your plan.
DAVID SHIELL, CPA, PFS, is president of Financial Horizons
LLC in San Ramon, a subsidiary of Armanino McKenna. Dave can
be reached at (925) 790-2894 or [email protected].