Retirement lifestyle planning Featured

8:00pm EDT October 26, 2007

Retirement hovers out there like an oasis. You can almost feel the excitement of travel, the relaxing hours on the golf course and ample quality time with the grandchildren. But retirement’s not cheap — you’ve got to pay to play.

“You could spend about 5 percent of your retirement capital every year,” says David Shiell, president, Financial Horizons LLC. “When you do the math, that’s a pretty big number to accumulate.”

Smart Business talked to Shiell about how routinely assessing your retirement needs and monitoring investment costs and risks can help ease you into the retirement lifestyle you deserve.

What is the biggest flaw or omission you see in retirement planning strategies?

The most common flaw is that people underestimate what their financial needs will be when they retire. A good estimate: for $100,000 of yearly spending in retirement, you probably need about $2 million of retirement capital. If you do the math, we’re assuming that you could spend about 5 percent of your retirement nest egg every year. That’s quite a sum to accumulate in retirement, particularly out here on the West Coast. We figure retirees are going to need $3 or $4 million to have a comfortable retirement. Many times we live month-to-month and we don’t really have a handle on how much we’re actually spending.

What should be considered when determining retirement cash flow needs?

Most people in retirement are probably spending a little more than they planned upon, at least early on. Typically, there’s a great interest in travel, and travel is a fairly expensive proposition. As they grow older, the spending ramps down.

Retirement cash flow planning really becomes an exercise in math to a certain extent. We work with future retirees to analyze, for example, how much they have accumulated in their savings plan so far, their investing style, how they are investing these assets, and then determine the expected rate of return that might apply to them. Once we know all of these factors, there are calculations done that help guide retirement cash flow planning. Investors can also tap a number of Web sites that help with retirement cash flow planning.

What nuts-and-bolts investing practices can help build retirement assets?

We try to get our clients focused on good, basic investing strategies. One of the most important aspects is to keep investing costs down. Your return on investment is net of whatever you are incurring in terms of management fees, transaction costs and even tax costs. Investors should make sure they’re using funds, low-cost funds or perhaps exchange-traded funds. It’s important to focus on the after-tax returns that mutual funds are passing out at the end of the year and make sure, to the extent possible, that gains and losses are matched to try to minimize capital gains. In this area, index funds can be used to minimize taxable events in accounts.

Investors should also be diligent about diversifying and rebalancing their portfolios from year to year. For example, a popular investment for the last five years has been real estate investment trusts. They had a great run with tremendous gains. But because we don’t expect those returns to be the same going forward, it’s likely that this part of the portfolio needs to be rebalanced to bring it in line.

How do wills and estate documents come into play?

It’s surprising how many clients come in and have done nothing in the areas of wills or trusts and documents like power of attorney for health care. People don’t like to think about these things — it’s planning for a potentially bad event, and we tend to shuffle these things off to the side. People need to consult a recommended estate attorney to implement a will that handles concerns with children and financial matters and get those power of attorney documents completed. The attorney can also help decide if a trust is appropriate for your situation; certainly for larger estates, a living trust would make a lot of sense and can lead to potential estate tax savings.

How can insurance protect retirement assets?

It’s important to protect the income earner. The individual who is the primary income earner in the family needs to have a good life insurance policy and a disability policy to maintain the income flows to the family. That process involves evaluating how much insurance is necessary: Is the mortgage covered? Do we have several years of income covered? Do we have college expenses for children covered? People should put estate planning and insurance on their to-do list and accomplish them at the same time.

How can busy executives monitor their retirement asset track?

It goes back to creating a retirement cash flow planning document. It can be put together in just a couple hours time with the help of a financial planner or through one of the brokerage Web sites. That retirement cash flow plan provides a model that helps monitor your progress year-to-year so you can say, ‘At age 53, I expected my retirement assets to be there, and they’re not. I may need to adjust my plan to meet those goals.’ It’s a great tool to help determine where you are in terms of your plan.

DAVID SHIELL, CPA, PFS, is president of Financial Horizons LLC in San Ramon, a subsidiary of Armanino McKenna. Dave can be reached at (925) 790-2894 or