A Fresh Look at Your Retirement Plan

A Fresh Look at Your Retirement Plan
by Your Name, CFP

Recent market events compel us to review your retirement plan in a more realistic way After every market correction, we see that plans that were prepared using conventional retirement calculators, become irrelevant Retirement dreams seem to be pushed further and further away, especially after each market correction
Copyright 2009 Retirementoptimizer.com Inc.

Before your retirement dreams turn into retirement nightmares, lets review your retirement plan This time, I propose using a new tool that is significantly more innovative than other retirement calculators that we have been using This new retirement calculator uses an entirely different philosophy. It may change the way we look at retirement planning

All conventional retirement calculators make a FORECAST using certain assumptions:
average assumed portfolio growth rate average assumed inflation

The following example shows the reality for three generation of retirees: The grandfather retires at the beginning of 1929 His son retires at the beginning of 1966 His grandson retires at the beginning of 2000

Each one starts with $1 million of retirement savings Each one needs $60,000 to take out annually Each one start his retirement at age 65 We assume an annual portfolio growth rate of 8% We assume an inflation rate of 3% per year
Lets see what happens to their retirement dreams:
Standard Retirement Plan

$2,000,000
$1,500,000
Portfolio Value
GREAT! I will have sufficient money for retirement
$1,000,000
$500,000
$0 65 70 75 80 Age
85
90
95

The forecast looks fantastic! Lets do a Reality Check
Grandfather retires in 1929

100,000
10,000
Wow! Nice Bull Market! Time to Retire!
DJIA
1,000
100
1929
Data Source: Dow Jones & Company
10 1900
1920
1940
1960
1980
2000
2020
Grandfather is broke 9 years later! $2,000,000

$1,500,000
Portfolio Value
1/1/1929
$1,000,000
$500,000
1/1/1938
$0 65 70 75 80 Age 85 90 95
His son retires in 1966

100,000
10,000
Wow! Nice Bull Market! Time to Retire!
DJIA
1,000
100
1966
10 1900
1920
1940
1960
1980
2000
2020
The son is broke 13 years later!

$2,000,000
$1,500,000
Portfolio Value
1/1/1966
$1,000,000
$500,000
1/1/1979
$0 65 70 75 80 Age 85 90 95
100,000
The grandson retires in year 2000

10,000
Wow! Nice Bull Market! Time to Retire?
DJIA
1,000
1/1/2000
100
10 1900
1920
1940
1960
1980
2000
2020
The grandson will be likely broke only 12 years later!
Age: 65 Age: 77

In the real world, it does not matter how accurate your assumptions are for your forecast. What matters is the SEQUENCE OF RETURNS that you experience during the early years of your retirement.
Portfolio Life Depends on How Lucky You Are

100,000 10,000
DJIA
1,000
Sometimes, you might catch a bullish trend: You can have income for 40+ years
More often than not, you dont catch a bullish trend: Portfolio lasts about 15 years
100
Portfolio Life, yrs
40.0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
1980 1990
20.0 10.0
1900
1910
1920
1930
1940
1950
1960
1970
2000
2000
30.0
10

The retirement planning tool that I use, does not forecast anything. It does not require any assumptions or averages This new tool only uses the actual market history. This method of planning is called AFTCASTING Aftcasting shows you all possible outcomes based on actual market history since 1900
Your Retirement Plan based on Actual Market History

Now, you can decide in a much more informed way:
When can you retire? How much do you need to save until retirement? How much you can spend after retirement? What strategies can you to use for lifelong income? How can you export the longevity, market and inflation risks to others?

OUR GOAL: To determine your essential and discretionary expenses during your retirement To figure out when you can retire To create a personal pension for your essential expenses To minimize the luck factor for your retirement age To optimize your current portfolio to maximize return and minimize risk

Lets try this new tool and see how we can plan your retirement more realistically.
Do you want to go ahead?
Disclaimer
Otar Retirement Calculator (ORC), illustrates how a mix of asset classes (stocks, bonds, cash or inflation indexed bonds), or income classes (investment portfolio, immediate life annuity, variable annuity with or without guaranteed income), would have fared under historical market conditions, given your stated financial goals and your cash flow. It does not provide a prediction of your ability to meet your goals; rather, it merely reports the hypothetical outcomes that would have occurred in the past. ORC should not be used as the primary basis for any investment or tax-planning decisions. Results will vary in the future. ORC is not intended to predict the future value of actual investments or actual holdings in your portfolio. It is also not intended to predict the current and future value of actual lifetime income.
Seven Steps for Using ORC

1.
Determine retirement income and expenses

Use the Retirement Income Cash Flow Worksheet and Budget or your own worksheet. Spend as much time as needed to figure out these numbers as accurately as possible.

2.
Enter current information into ORC: Main Page: Current age, desired retirement age, current asset mix, the value of total assets earmarked for retirement, current level of savings (% of income or $/year), how much income required after retirement (% of preretirement income or $/year). Cash Flow Page: Any other income and expense information from Step #1. Observe the outcome, probability of depletion, etc. -If this is second opinion, enter the assumed growth rate and inflation in the existing plan into the comparative boxes on the main page. See if it Copyright 2009 Retirementoptimizer.com Inc.

3.
Asset Allocation - Optimize Asset Mix: Optimization of the asset mix is the easiest way of potentially improving the outcome. After optimization, observe the outcome, did it improve? - Is the optimum asset mix within your tolerable range? - Would you feel comfortable with this optimum asset mix ? If the answer is yes to both questions, change the asset mix to the optimum.

4.
Check the outcome: - Excellent: good news, skip to Step # 6

- Good, Adequate: must review annually or after major family or market events. But for the time being, skip to Step # 6
- Inadequate: needs work, go to Step # 5

5.
Ask, input and analyze one question at a time: - Can you delay retirement? - Can you work part-time after retirement? - Can you live on less money? (Distinguish between Essential versus Required expenses) - Can you save more money until retirement? - Do you expect an inheritance? - How does a guaranteed income product (SPIA or VAGMWB or VA-GMIB) improve the outcome? - Would you consider selling your home at age __ and then renting? Copyright 2009 Retirementoptimizer.com Inc.

6.
Income Allocation: Optimum pension creation Just like optimizing the asset allocation is important when creating wealth during the accumulation stage, optimizing the income allocation is important during distribution stage to minimize the luck factor. To reduce the effect of the luck factor, a pension needs to be created. - If the outcome is Excellent your investment portfolio already acts as your pension. Review annually. - Otherwise, you can crate that pension either through life annuities or variable annuities with Copyright 2009 Retirementoptimizer.com Inc. GMWB or GMIB with lifelong income

7.
Summarize and Present your Plan: - Print only what is necessary. I print usually only the the Main and Cash Flow pages for the base case, Optimization page if you are suggesting a change in the asset mix, and the Main page for all other scenarios. - Write your walk-through of questions, answers, scenarios - Ensure that there are no unanswered questions left - If you are handing over the plan to a client, follow your compliance rules.
Disclaimer
Otar Retirement Calculator (ORC), illustrates how a mix of asset classes (stocks, bonds, cash or inflation indexed bonds), or income classes (investment portfolio, immediate life annuity, variable annuity with or without guaranteed income), would have fared under historical market conditions, given your stated financial goals and your cash flow. It does not provide a prediction of your ability to meet your goals; rather, it merely reports the hypothetical outcomes that would have occurred in the past. ORC should not be used as the primary basis for any investment or tax-planning decisions. Results will vary in the future. ORC is not intended to predict the future value of actual investments or actual holdings in your portfolio. It is also not intended to predict the current and future value of actual lifetime income.

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A Fresh Look at Your Retirement Plan

by Your Name, CFP