If you are newly retired or approaching retirement, you should be proud of your accomplishments! You have worked hard for many years and saved diligently. Now you can focus on your hobbies, goals, family, and just about anything other than working.
However, this time can also be a stressful and uncertain one, even in the best of market conditions. During periods of high market volatility, that stress is understandably magnified. You may find yourself wondering, “Do I need to work longer?” or “Do I need to return to work?”
While everyone’s situation is unique, here are a few concepts to keep in mind when speaking to your financial advisor about your retirement plan.:
One of the best-known guidelines for retirement planning is the four percent rule, derived from a seminal study by William Bengen in the October 1994 edition of the Journal of Financial Planningopens PDF file 1.
In the study, Bengen tested various withdrawal rates and asset allocations at the start of retirement with adjustments for inflation from 1926 through 1976. The author concluded that an initial withdrawal rate of 4% in a portfolio comprised of 50% stocks and 50% bonds would have lasted at least 35 years in every scenario.
The 4% rule is certainly a place to start when considering your retirement spending ability, but it’s just that, a start. We recommend always working with a certified financial planning professional to review your specific situation. At Dowling and Yahnke, we take a much more rigorous approach to determining a financial plan’s probability of success with the primary goal of giving retirees peace of mind, even in times of market stress.
Rules of thumb and averages certainly help to provide a solid framework around decisions, but generally lack the deep analysis necessary for success.
For example, you would likely feel very confident in planning a beach outing in San Diego in July, anticipating sun and warm weather. However, in reality, it’s impossible to know if the weekend you pick will be sunny or cloudy or if something out of the ordinary would derail those plans.
Retirement planning is much the same. To account for the variability of reality, it’s helpful to stress test a portfolio through Monte Carlo simulations. The Monte Carlo planning method factors in the randomness of portfolio returns (good and bad) by evaluating the sustainability of your retirement goals through 1,000 variations of portfolio returns, producing a “probability of success.”
Sample Monte Carlo Simulation
With a better understanding of the likelihood for success, a financial planner can explore strategies, actions and adjustments that can help you achieve your retirement goals.
Whether you are still preparing for retirement or currently retired, your goals will likely change. This is why having the “what-if” conversation with your financial advisor is important when considering goals like:
An excellent advisor should not only be protecting your nest egg for the probable and likely, but also for the unlikely. While you focus on the fun “what-ifs”, your advisor can guide you through the tough decisions that may impact your plan’s success.
Wherever you are on your path to retirement (or even if you are well into it) completing a financial plan is a valuable and necessary step to ensure you are on-track. At D&Y we believe your retirement plan should only have to change when your goals change – not the market.
If any of the following situations applies to you, it may be time to complete or revise your current financial plan:
If you would like to learn more about Dowling & Yahnke’s approach to financial planning, please do not hesitate to reach out. Our mission, as advisors, is to help our clients walk away with a clear and concise understanding of where they currently are in their financial journey, and the “levers” available that will have the greatest impact on reaching retirement goals. We would welcome the opportunity to speak to you about our services.