A financial plan has three goals. It must be sufficient, it must be secure, it must be simple.
Sufficiency is a two sided thing. In a retirement plan, there must be enough assets to sustain desired lifestyle indefinitely and to deal with late life costs like healthcare. Failing this, lifestyle must shrink late in life or alternate means of income must be found.
In the same retirement plan, sufficient means enough and no more. Over-saving early reduces the present and makes it insufficient. Sufficient is a balancing act.
Secure has several meanings. They can be examined independently.
Secure in the sense that the money saved will not be lost is a common idea. The idea behind this is the money to be retrieved in the future is predictable. It will be enough to meet the established needs and it will be available at the right times. Many people cost themselves yield, emotional turmoil and management problems when they fail to notice the “right time” aspect. If you expect to use the money 20 years from now, then a market hit today is of little consequence. Similarly no one spends all of their retirement money on their 65th birthday. Again fluctuations are part of the process.
The key to this kind of plan is to notice that retirement plans consist of a process to change small monthly amounts of money into large sums of capital and then change the large sums of capital back into small monthly amounts.
Secure also includes the idea that the required savings will actually be there. Savings and retirement planning amounts to changing the value of a career into financial assets. The security assumption involves a decision that the career will last to retirement. Death and disability can change that. The risk should be transferred to insurers. They can afford the loss, you cannot.
Simple matters all the time. Simple is easier to understand and thus is easier to implement and review. Simple is easier to motivate yourself to do. Simple may be very important after the first of the couple passes on. The survivor may be incapable of managing the assets that supply income. Life insurance can overcome this to some extent, but all retirement plans should address the fact that both of you may not be available. There is always the risk of late life disability.
Simple plans tend to actually fulfill. Simple plans can return adequate yield without serious market risk. The key is to establish time as one of your key variables. If you would like 8% over a 50 year period with retirement at year 30, you will be forced to learn how markets really work. When you do the emotional drag becomes less likely to ruin the plan.
Most plans fail because they have not addressed the three criteria above and have left an emotional time bomb to destroy the outcome.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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