- Comprehensive Risk Analysis This is an essential, but severely underestimated, assessment when initially planning for retirement. It simply calculates how much volatility risk your investments are exposed to and determines if your distribution expectations are realistic. In other words, if the overall stock (or bond) market fell 30%, 40%, 50%, or more, could you continue to withdraw the same amount to live on? In most cases, advisors and retirees just assume that the market will recover losses in a short period of time, but sometimes, this is not the case. For example, if you retired in the year 2000, you would have had to wait almost 13 years before the stock market experienced any gains that exceeded market levels in 2000. This is the first step in realistically planning your retirement, and we encourage all retirees to better understand their exposure to risk.
- Retirement Income Analysis Once you understand your exposure to market risk, then you need to design a long-term income plan to determine how realistic your retirement income objective is. A retirement income plan should be analyzed during both positive and negative market conditions to provide a realistic understanding of how either scenario can affect your retirement. This can help determine how much volatility risk your retirement assets can tolerate while you are taking regular distributions to support your retirement. The objective of this analysis is to better understand how much of your retirement income is at risk if markets experienced poor conditions for an extended time period. Although we all hope that the markets will “agree” with our retirement, rarely do advisors analyze (or present) how sustainable your retirement income distributions are under less-than-ideal market conditions. We insist on both positive and negative scenarios being considered prior to implementing a long-term retirement income plan so that you recognize the pros and cons of using the stock market as a significant source of your retirement income.
- A Basic Understanding of the Modern Financial System Although most might not find it too exciting, we strongly encourage all of our clients to have a basic understanding of the very unique market conditions in which they are retiring. A risk analysis and retirement income analysis can be very helpful in understanding your personal objectives, but how your personal objectives relate to current market conditions is equally important. We teach classes regularly throughout the year to provide a detailed education on retirement income planning in very complex and potentially risky market conditions. Understanding how your objectives can be directly impacted by market conditions is critical in the process of planning for your retirement. Assuming that the financial markets will be “fine” and provide you with the income that you hope to have is a very risky plan. The stronger your understanding is of modern market conditions, the more likely it is that you will be able to plan accordingly for the retirement that you would like to experience.