Holistic Retirement Planning

by: Russell Bailyn

I had a client in yesterday who asked me how much money he would need to retire comfortably. It's probably one of the more common questions which people ask their financial advisor and each of us has a different way of handling the process. For years my answer has revolved around quantifying goals and having a savings/investment plan to reach those goals. Depending on the success of the client over time to meet their savings goals, combined with any help offered by the market, we continuously amend the retirement goals and go from there. I've always been half comfortable with this system. The upside is that it encourages people to save and invest, and that can never hurt. The downside is that retirement is a very subjective goal and it's very difficult to define its price decades in advance. So I've decided to change my approach to something which strikes me as a better solution for most people.

My new solution is a more holistic, values-based approach. If someone asks me how much they need to save for retirement, I'm going to start by seeking out a complete understanding of how this person enjoys spending their time. Retirement planning is often about figuring out what it is you like to do and how to best enjoy your time at a point when your earnings power has diminished. Most people don't need as much money as they think they do. Careful self reflection may help you focus in on your retirement vision and how to enjoy your life without spending gobs of money. The reality is that most people will fall short of their lofty savings goals anyway, so finding a way to live on 50 or 60% of your pre-retirement income can really keep the stress off in later years.

When it comes to finding financial products that mesh well with this planning approach, retirement planning experts such as Zvi Bodie and Robert Merton have suggested optimizing income and spending while reducing the possibility of having even more money, but risking not meeting your financial goals. Essentially utilizing annuity and other insurance related products can help an investor very closely estimate the amount of income they will have during retirement without having to worry much about market volatility coming at the wrong time and putting a crimp in retirement plans, a scenario which unfortunately panned out for many retirees and near-retirees around 2008 and 2009.

Take the following example: A couple retires at 65 years old. They have accumulated $700,000 and will receive a pension of $3,000/month along with combined social security of $4,000/month. By converting $500,000 of their nest egg into an annuity, they may be able to guarantee another $2,000-$2,500/month, giving them a fixed monthly income of $9,000-$9,500. They would have $200,000 left as a nest egg, rainy day fund, and for unexpected large expenditures. This may be a more optimal situation than trying to generate $5,000/month off the $700,000 lump sum but needing to build a more risky portfolio including more stocks and lower graded bonds in order to spin off the extra income and attempt to preserve the capital over time.

At the end of the day, the purpose of money during one's retirement is generally to support a desired lifestyle, so let's start by focusing on that lifestyle and then figuring out the most stress-free, reliable way to get there.

Disclaimer: Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

There is no certainty that any investment strategy will be profitable or successful in reaching your investment objectives. Guarantees are subject to claims-paying ability of the issuing insurance company and are subject to certain limitations, terms and conditions. Withdrawals and other distribution amounts, including death benefit payouts, will be subject to ordinary income tax. There may be fees or costs for additional features or riders. Product availability and features may vary by state so please discuss costs, features, and benefits with licensed insurance agents.