Nearing Retirement? Financial Advice Is Critical

This article discusses critical planning issues that may need to be addressed with a financial professional prior to retiring.

Retirement planning has become more challenging in recent years. Stock markets remain volatile and unpredictable, yet "safe" investments such as money market accounts and CDs have continued to offer relatively low short-term interest rates.

Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes. Investors planning for retirement have questions about how these factors will affect their retirement funding issues. Have I saved enough? What is a reasonable and sustainable withdrawal amount? Can I plan for retirement while also meeting other intermediate financial goals, such as educating children and paying off debt?

These and other questions weigh heavily on the minds of most retirement investors. What's the solution? While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still pursue retirement security. But to do so, you may want to consider engaging the services of a financial planning expert.

Once retained only by the wealthy, financial professionals now assist all types of investors in making decisions about retirement. In fact, perhaps one of the most common reasons for people to begin financial planning is to build a retirement fund.

Countdown to Retirement

Have you begun your countdown to retirement? If so, a financial professional can help you make an efficient transition to the next stage of your financial life. Following are some critical areas to address with your financial professional a few years before you expect to retire.

Determine what retirement will cost. Many people enter retirement without the slightest clue as to what they want to do with their time -- or whether they have enough money to do it. Will you continue to work part time? Travel? Maintain a second residence? Make improvements to your existing home? Be sure you plan how you'll spend your time -- because that decision will have a direct impact on how much retirement will cost you.

Assess your sources of retirement income. Estimate the income and savings you can rely on during retirement. How much will you receive from Social Security, a company pension, 401(k) plan, or other employee-sponsored retirement accounts? Contact the Social Security Administration at and/or your employer's retirement benefits representatives to obtain a report listing the estimated income from these sources. Confirm amounts in any other retirement plans, such as IRAs and personal investments. If your anticipated income does not equal or exceed your projected expenses, develop a plan to bring these two into alignment.

Arrive at a spending limit. Once you have a handle on expected income and expenses, calculate how much you can withdraw from your accounts each year without spending down your principal. Your financial professional can create various withdrawal scenarios based on forecasted investment returns, inflation expectations, and other practical financial planning considerations.

Accounting for Uncertainty

In the past, calculating annual withdrawal amounts was done by means of simple spreadsheet analysis. A planner would use historical performance averages to project future portfolio values and automatic calculations for variables such as inflation and life expectancy. The problem with such an approach is that the lack of flexibility in the calculations makes it difficult to account for year-by-year variations in outcomes or changes in an individual's life or lifestyle that can affect underlying assumptions.

Fast forward to the present where sophisticated computer forecasting models, such as the Monte Carlo simulation, have become the preferred tools for dealing with the uncertainty surrounding retirement planning. When used in investment decision making, the Monte Carlo simulation forecasts how a portfolio is likely to perform under thousands of possible scenarios based on a combination of parameters -- such as life expectancy, interest rates, equity returns, and inflation -- and modeled around a specific problem (e.g., How much can I accumulate for retirement?). Results are recorded and ordered according to which scenario is most likely to meet the investor's retirement goals.

With more attention being paid to retirement planning, forecasting tools based on the Monte Carlo simulation have enjoyed a renewed popularity in investment analysis. In an uncertain world, such tools can help provide confidence to investors by addressing some of the toughest retirement planning challenges. But remember, any forecasting tool, no matter how sophisticated, cannot predict the future. What's more, forecasts are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future performance. For this reason, you should think of forecasts as a starting point for discussion with your financial professional -- not as your ultimate planning solution.


This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

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