It’s that time of year when people are making New Year’s Resolutions. The most common resolutions are about health and fitness or finances. As a Retirement Specialist, things get a little busier during this time of year.
Generally, people want to meet with a financial expert and get things started in January. Some are just getting started early in the year while others have had this resolution on their list for several years. Whether it is a new year, new job or major life change, there is typically something that motivates people to get their finances in order.
When someone comes into my office, I start by helping them create their vision. If it is related to retirement, what do you want to do in retirement? If it is related to education planning, do you want to be in a position to fund for any university, public and private school? Some people know exactly what they want to accomplish, others need help developing a starting point. In either case, developing a target is useful. As Yogi Berra said, “If you don’t know where you are going, you’ll end up someplace else.”
Once we have developed this vision, we need to turn this into a financial goal. If you want to retire and have two homes, how much will this cost? What is the cost to maintain these homes? The questions may seem difficult to answer; however, you can use estimates based on your current spending habits. Also, there is a lot of information that you can find online to get some estimates quickly.
Now that you have a goal, we look at where you stand. We look at all of your assets, liabilities, income, expenses, insurance policies etc. This helps us establish where you stand so you can determine what is needed to get you to your goal. This is important because it will not only give us a starting point for the lifestyle you would like to maintain in retirement but also what your retirement will cost. There are a variety of rules, typically based on your age and what percent of your expense level you should prepare for. I prefer coming up with a customized target for each person. If someone wants to be a luxury world traveler in retirement, their expenses will be a lot higher than someone who wants to stay home and read in retirement. This is why I am not a fan of using general rules for planning your specific goals.
We then review your personal risk tolerance and the current markets to create a hypothetical rate of return. I typically assume a rate of return between 6%-7%. Throughout my career, people have asked about this target. When the markets are going up, people think they can get double digit returns forever. When the markets are going down, people think 6%-7% is impossible.
Another important input is inflation. We currently use inflation at 3.87%. Since 1929, inflation has only been at this level or above it 1/3 of the time. Only once has inflation been at or above this level since 1990. This is a conservative assumption. If you have a little more in retirement, that is a good problem versus not having enough.
Finally, now that we have developed your financial plan, we need to make sure your investments are managed in line with your risk tolerance and your goals.
If getting your finances in order is one of your New Year’s Resolutions, make sure you get started on it. This may sound like a lot of work, however once you have gotten the system set up, it only takes a few hours a year to keep you headed in the right direction.