“We try to get to know clients in the initial stages of working with them,” says Patrick McFawn, director of Doeren Mayhew Financial Service, LLC, in Troy. “It puts us in a better position to advise them properly in terms of various strategies that we can use to enhance their potential retirement income down the line.”
Smart Business spoke to McFawn about a new system to help with the planning process.
What makes your approach to retirement planning unique?
Retirement plans should try to achieve three things. One, clients should have confidence that they are on the right track as they prepare for retirement. Or, if they are retired, that they can spend at reasonable levels without the fear of running out of money during their lifetime.
Second, clients shouldn’t have to make any unnecessary sacrifices in their lifestyle before or during retirement.
And third, clients should achieve their financial goals and objectives with the lowest level of risk possible.
In the past, some financial advisors would ask clients to identify their maximum tolerance for risk and, once established, they would structure the portfolio to expose them to that risk level. During the ‘80s and ‘90s that was fine because the higher levels of risk usually resulted in higher returns. Beginning in 2000, the stock market went through a 30-month decline that resulted in a 43 percent drop in value. This reshaped the way people thought about risk, since it was the first time most investors had to live through a prolonged and painful decline in the stock market.
As a result, most people are focused on reducing their risk. So they have to identify the appropriate level of risk to achieve their financial goals and objectives and still generate competitive and consistent returns.
Clients should get answers to retirement planning questions under two separate models: acceptable and ideal. The acceptable model assumes that they wish to maintain their current standard of living throughout retirement; the ideal attempts to improve upon it. Many planners never address ideal goals, and clients typically don’t bring them up since they assume they can’t achieve them.
Frequently, clients are unable to achieve all of their ideal objectives. But in many cases, they can easily achieve their acceptable goals and objectives. That gives advisers the opportunity to create a recommended model that attempts to retain some of their ideal goals and makes their retirement years more gratifying.
How does such a system work?
The system recreates a time frame equal to a client’s life expectancy. Then, based upon the level of risk the client assumes, it allocates the existing assets into stock, bond and cash markets over their life expectancy.
If a client has a life expectancy of 35 years and is willing to accept a moderate level of risk, the system would assume that approximately 60 percent of the client’s money would remain in the stock market, 37 percent would be allocated to bonds, and 3 percent to cash.
Then, instead of factoring in a projected rate of return for 35 years, the system utilizes historical rates of returns that have actually occurred in those markets from 1926 through the present. It randomly sequences gains and losses from those markets to get a more realistic rate of return for planning purposes. The withdrawals are assumed to begin at retirement to meet cost of living needs, pay taxes and offset the impact of inflation. The system shouldn’t do this just once; it should run 1,000 tests that reflect 1,000 different rate-of-return scenarios. The object is to see if it can make it through between 750 and 900 of the tests without running out of money.
Is the analysis run only once or can it be updated periodically?
Retirement planning is an ongoing process that needs to be updated and monitored at least once a year. Many of the variables that the tests were based upon will change over the years, such as risk tolerance, savings rates, spending limits, etc. By updating the plan annually, the client can see what impact any changing variables will have on his or her potential to achieve long-term retirement goals and objectives.
PATRICK McFAWN is director of Doeren Mayhew Financial Services, LLC. Doeren Mayhew Financial Services, LLC is an affiliate of Doeren Mayhew, located in Troy, Michigan, providing a wide range of professional services to middle-market companies. Reach McFawn at (248) 244-3200 or email@example.com.