Without question, the number one mistake we see with 99% of retirement income plans is failing to take into account how drastically the financial system has changed in the last two decades.
Monetary and regulatory policy has drastically reshaped how the financial markets function, and recognizing these differences is essential when designing a retirement income plan. We have found that very few, if any, retirement planning models take into account the historic shift in interest rates, the highly active role of the Federal Reserve in the marketplace, or the structure and risks associated with an ultra-complex system of debt, leverage, technology, and policies that cause the markets to function in its current form. Ignoring these complexities does not make your retirement income plan immune to them, it simply means that your income plan has not accounted for the risk associated with these concepts.
The first section of our retirement planning course offers an in-depth look at the complex dilemmas of the modern financial system to provide retirees a genuine understanding of the unique factors associated with retiring in the 21st century. It is up to each individual to decide if these varying factors are relevant to their retirement or if they should be accounted for in their income plan. However, it is our opinion that these concepts are not only critical to retirement planning, but to each and every investor who is wanting to maximize their long-term financial objectives. It is also our opinion that the past decade has severely impacted investors’ expectations of what is and is not realistic in terms of long-term growth rates. Everyone wants to expect the best and financial advisors want to present the best-case scenario, but this is not likely to end well. This is why we insist on looking at real-world examples of the best, worst, and most realistic possible outcomes for your retirement income planning objectives. The following is an abbreviated list of the questions that we consider when analyzing your plan.
- How much of your income is guaranteed and how much is based on market speculation?
- Is the growth rate you are using in your analysis realistic and what happens to your plan when the market experiences volatility or a long-term period with little to no growth?
- Do the accounts you intend on using for income distributions have an appropriate risk that accounts for volatile market conditions or would your distributions have to be reduced?
- Are your assets truly diversified or do they only “look” diversified? Over the past decade, there have been noticeable problems with traditional diversification strategies that have raised questions as to how realistic and sound these strategies perform under poor conditions.
- Have you properly accounted for all of your income sources and associated taxes?
- Are your required minimum distributions calculated correctly and do you have a plan for maximizing the use of excess RMDs?
- If something happened to you or your spouse, have you accounted for how your income would change? (Loss of a social security benefit, pension benefit, etc.?)
- Have you factored in the significant changes in monetary policy over the past decade and more importantly, the possible effects that this could have on long-term investing?
- Is your target retirement income objective realistic and does it account for longevity? This is the largest flaw we see in most retirement plans. Fully understanding how and where you are going to be able to draw income for the next 20, 25, or 30+ years is essential.
- Finally, how easily can your retirement income plan adapt to changes in your life and in the financial marketplace? Creating a sound, realistic retirement income plan is merely the first step in the process; maintaining and updating your plan on a regular basis is every bit as important.