At long last you have reached the time in your life when the reality of
retirement is within your grasp.  Years of hard work, scrimping, saving and dreams are about to payoff.  The balances in your portfolios and retirement accounts have benefited from the latest market rally and you think you are close enough to put some concentrated effort into picking a date and planning for a time of leisure and happiness.

   On the surface the process seems to be an easy one.  Unfortunately there 
are a number of hazards sitting out there that could easily derail your plans and severely compromise your retirement lifestyle.  In making choices about your retirement plans you may be making one assumption that could give you 
a false sense of security.  If you uncover your error early enough you have time to recover; if you don’t find the error your actual retirement dreams could become a nightmare.
   Many of the decisions you make before retiring are actually pretty easy. For example, when you retire you probably lose your employer sponsored health benefits.  If that is your situation you have the Medicare health plan available to you and all you have to do is look for a well-structured supplemental health insurance plan.  There are many vendors out there and plenty of un-biased information is available to help you choose a plan that is appropriate for your needs.

   Then there is your 401(k) plan.  Do you leave it with your employer’s plan or roll it over?  Don’t even think about annuitizing that amount.  Right now interest rates are so low that locking in these rates via an annuity is financial suicide.  The better choice is to roll over the balance to an IRA and either manage it yourself or have an experienced investment advisor handle that chore for you.  Obviously the latter choice is my recommendation, but then I
am a little biased in that direction.
   You also have to make decisions about your wills, where you are going to live, what you are going to do with your time, and whether you should buy long term care insurance.  But like I said, those decisions are relatively easy ones.  For the most part a wrong decision with any of these is easy to correct.

    The real tough question in planning for your retirement and the one that most people get wrong is that they use the wrong rate of return on their retirement assets.  This is important because this assumption determines how much income you can take off of your investments.  It will determine your
retirement lifestyle.
      Retirement planning is really nothing more than cash flow planning.  By 
now you are used to living off a stream of income generated by working.  
That income is relatively steady, somewhat predictable and likely is the determining factor of your lifestyle.  However, when it comes to retirement cash flow, you determine how much money you are going to live on. Underestimate it and you could be needlessly reducing your retirement lifestyle and end up leaving a large sum to your heirs.  Overestimate it and you may find that you run out of money long before you run out of life.

     Here is how your troubles can start.  You take your investment balances, 
plug in a rate of return and compute away.  If you purchase one of the 
“Managing Your Money” programs that are available you can use that tool to
generate your cash flow projections.  Whether you do it yourself or with a  
computer program, you may still have a problem.  The only difference is that
the program does the calculating faster.  The results though may still not be 
realistic.
     The major problem with most of these programs is that they use the 
number you have given them.  Be it 6%, 8% or 10%, the results are only as  accurate as the number you give them.  Even if you did have a crystal ball and
could see what the next 20 years of stock market returns were going to be, 
you still would be inaccurate to use that number.

     The reason for the inaccuracy is twofold.  First and most important is that 
the market does not go up, or down, at the same rate each year.  As we saw 
in 1998 and 1999 it was up a significant amount.  In 2000 - 2002 we saw the
worst bear market in 60 years.  How do you account for that in your projections?
       Even if you did account for those types of wide variations you have to decide where you plug those returns in to your calculations.  Do you put them at the beginning of your retirement years, in the middle or at the end? See the problem?
        The second problem in determining your projected rate of return is: how
many years of return should you use?  The common thinking is that the more
data points you use, the more accurate your projections will be.  That is not
necessary the case.  If 30 years of history do not yield an accurate answer,
why would 40, 50 or 60 years be any different?

     When doing your cash flow planning for retirement it is imperative that you
use proper assumptions and that the tool you are using is accurately modeling your circumstances.  If you fail in either category, the income you are depending on for retirement may not be what you should actually be living off.
      Whether you do this yourself or seek professional guidance, you need to know 3 things.  First are your assumptions about rate of return realistic? Can you with reasonable assurance know that your rate of return is  attainable over a long period of time?

     Second does your forecasting model take into account the variations in market returns?  As stated earlier, the markets don’t go up at a steady rate: they vary every year.  That must be factored in.
     Finally given that you have satisfied the first two conditions, what is the probability that your assumptions will provide you with the retirement lifestyle you want.  You need to have a reasonable chance of actually meeting these projections.   If your calculations don’t give you that answer, then you need to seek assistance from a competent advisor who can give you the answer.
      Not paying attention to all of these three issues may cause your retirement to be something entirely different than what you had planned on.

Contact Mark Neil at:
Northwest Wealth Advisors, Inc 
0605 SW Taylors Ferry Road
Portland, OR 97219
Office: (503) 478-6632 
Fax: (503) 595-1863 
Email: mneil@nwwealtadvisors.com 
Website: http://www.nwwealthadvisors.com/

© 2004 Mark Neil