So, What's the Plan?


By Ellen Hoffman At ages 47 and 50, a couple visited a financial planner, hoping he would tell them they could afford to retire immediately and maintain their current lifestyle. After analyzing their financial resources and expenses, the planner, Scott Brewster of Brooklyn, N.Y., identified two obstacles. First, their current lifestyle involved a lot of costly entertaining, home renovations, and pleasure travel. Second, after experiencing losses in tech stocks, they had invested all their money in bonds, which would not generate enough income to last through a long retirement.

Brewster offered his clients two alternatives: Retire now and live much more frugally, or postpone retiring until they could have a better chance of maintaining their current lifestyle. The option for delaying retirement meant diversifying their portfolio into 50% stocks and 50% bonds.

Making a plan "is all about personal trade-offs," Brewster says. "We went over the worst-case scenarios of what happened during the recent bear market and other bear markets, and they are more comfortable now that they understand what to expect" from market fluctuations.

THREE STEPS. The couple opted to continue working, he until age 65 and she, at least a few more years, until they could salt away enough money. Because they took the trouble to examine their options and create a specific plan, this couple made their decision with clear knowledge of the trade-offs involved.

In my last column (see BW Online, 3/11/05, "Time to Abandon the 70% Solution"), I listed three main steps in retirement planning: estimating your financial needs and goals, creating a plan to meet the goals, and implementing that plan. This column explores how to do the second step: creating a plan to generate the income you'll need.

If you think you're too young to bother with a plan, remember that when it comes to building savings, time is on your side. If you know at age 40 that you'll need $1.5 million to retire comfortably, you will be better able to make savings, investment, career, and lifestyle decisions that will increase your prospects of meeting your goal.

FACTS AND FANTASIES. And if you're a lot older than 40, having a concrete plan can help you identify such "catch-up" strategies as trading in your large home for one that costs less to maintain, or increasing your 401(k) contributions.

When I asked several financial planners how they work with clients who have already figured out the amount of money they'll need in retirement, they all said they start by compiling information on the client's financial status and potential retirement resources. Brewster asks clients to provide up to 26 different types of documents, including investment- and retirement-account statements, tax returns, mortgage statements, insurance policies, and wills.

When reviewing the information, Brewster says he raises such issues as whether the client has a realistic idea of future pension income. If the client were to switch jobs 10 years before retirement, for example, the final pension could end up being less than anticipated.

TIGHTER FOCUS. Next, a planner analyzes the information and devises financial strategies to propose to the client. Depending on the client's wishes and the planner's work style, the recommendations may end up very comprehensive or more targeted. Usually, the planner packages the recommendations in a written document, which may run 50 pages or more, with charts to illustrate information such as potential cash flow.

Bernie Kiely, a financial planner in Morristown, N.J., says his version of a comprehensive plan would include sections on tax analysis, cash flow, and investment analysis, and some very specific recommendations. For example, "I may determine that the client cannot afford to maintain both a house on the Jersey Shore and one in town. In the plan, I'll forecast what the house on the Shore will be worth, what you might get if you sell it, and the impact on your taxes," Kiely explains.

Says Dan Danford, a financial planner in St. Joseph, Mo.: "A comprehensive plan is a benefit for many people, but I also think there are many who buy the book [the plan], get 100 pages of details about everything in their financial life, throw it on a shelf, and never look at it again." He prefers a more targeted approach. "If someone comes to talk to me with a question related to retirement, I study the heck out of it and make recommendations. I don't think I need to look at every detail of their financial life," he says.

PLANNER FEES. Danford provides recommendations to his clients in the form of brief letters. For a client who requested advice on his IRA, which was 75% invested in one blue-chip stock, Danford wrote a two-page reply suggesting a schedule for diversifying that stock, and identifying the pros and cons of other potential investments.

The cost of a retirement plan ranges widely, depending on the process and product, as well as on prevailing rates in your area. Kiely charges a $2,900 flat fee for a comprehensive plan. Bonnie A. Hughes, a planner in Chattanooga, Tenn., charges $180 an hour. She says the bill usually adds up to around $2,000.

Your professional will have the advantage of working on software that charts specific scenarios dependent on your likely longevity, savings, investment return, and the like. But if your finances are fairly simple, you can come up with your own version by organizing all your potential retirement-income sources and expenses and then consulting with your broker and a tax expert on maximizing your investment potential.

BE PREPARED. Many financial-services companies offer retirement planning-tools on their Web sites. Two noncommercial sources of information with useful tools are Planning for a Secure Retirement, developed by Purdue University Extension Services, and the American Savings Education Council, sponsored by a public-private Washington-based nonprofit. Mutual-fund owners may find that the company offers financial-planning services through the Internet or on the phone for a reasonable fee.

This week, the nonpartisan Employee Benefits Research Institute and the Matthew Greenwald & Associates market research firm, both based in Washington, D.C., released the 2005 version of the annual Retirement Confidence Survey. One of the findings: More than a quarter of those who feel "very confident" about their retirement prospects owe that peace of mind to "doing a good job of preparing financially." It's hard to imagine a better way to prepare than by making a plan that follows your goals.

In the next Your Retirement column: How to implement your financial plan for retirement. In addition to writing "Your Retirement" for BusinessWeek Online, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her via http://www.retirementcatchup.com


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