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Are you Ready for Retirement: Part 3

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This is the third in a series of ‘Are you ready for retirement?’ articles.

Read article one here and article two here.

 

“I’m happy, don’t get me wrong, but I’m also a little confused,” Jenny looked at us, still smiling, but with a slightly quizzical expression.

She continued, “You see, when we came in here asking if we were ready for retirement you asked us some questions, did some maths and told us that we had a 25% probability of having it all work out the way we desired.  Then you did some more maths and told us we had a 75% probability…”

Now we were smiling.

“So, what happened?  How did you do it?”

“We did it by listening to you tell us what is most important to you; what your highest retirement priorities really are.  And that was to retire now, for the sake of Gavin.  We also listened to you tell us what you were flexible with, such as your estate and the amount you spend each year.”

“Jenny, all we did was guide you to make smart decisions and to prioritise what matters to you the most.  I’ll show you how.”

Let’s recall where we started. Gavin and Jenny laid out their aspirational retirement goals including retiring right away, leaving the children a large estate from the portfolio and living on $120,000 per year.

The chart below gives the detail.  The first row shows that, if Gavin and Jenny do nothing and keep their retirement plans unchanged, there is only a 25% probability that the results will turn out as planned, or better.

In the remaining rows we order Gavin and Jenny’s retirement priorities, starting with low priority retirement factors such as estate and portfolio risk, and finishing with their high priority items such as the year of retirement.

We turned to Gavin and Jenny, “Clearly, a 25% probability of success is not acceptable.  It basically means we require markets to do better than expected in order for you to reach your retirement goals.  So what we did was start with the retirement factors you told us were the lowest priority for you.  Your lowest priority item was the value of your portfolio within your overall estate.  You told us you were flexible to reduce it from $400,000 to $200,000 in today’s dollars.  Doing that increased the probability of success to 30%.”

Gavin looked up with a laugh and said, “So basically you’re increasing our probability by worsening our retirement plans?”

We chuckled, “Well, sort of.  We want you to have the retirement you desire.  But Gavin, if something’s got to give, we’re going to start with the things you feel least strongly about.  That way we can protect the more important factors, such as retiring as soon as possible.”

As we go through their retirement factors from low priority to high priority, the following strategy emerges.

Gavin and Jenny were quick to pick up the implications as we looked at the chart, “So basically, retiring now is possible.  It just means making trade-offs on all those other factors.”

“That’s right.  We recommend you think about this and consider the recommended trade-offs carefully.  You don’t need to make a decision today.  In fact, you can come back later and ask us to run other scenarios based on some modifications.  This is an important decision; this is your strategy.  The important message for today is that retirement today is possible, if the recommended trade-offs feel right to you.”

Gavin leaned back, puffed his cheeks and blew out.  He turned to Jenny, “This feels good to me.  It’s so nice to know we have some options.”

Jenny responded, “Yeah,” and turned to us, “Would you mind if we went home and thought about this a little more?  I mean, it feels right, but it’s a big decision.”

“Absolutely, we think that’s wise.”  Jenny looked a bit relieved.  We continued, “It’s important for you to know that, in our experience, the goal posts will move.  What we mean by that is life’s unexpected circumstances, good or not so good, will likely require you to adapt your financial strategy.  We understand that, and we want you to know we’ll adjust your strategy accordingly.  This could be due to something good, like a child’s wedding, a big vacation, or anything else.”

“Our daughter’s wedding’s already over, thank goodness!”  Gavin exclaimed.  “But if grandkids come along I could see a long trip to the UK for a visit.”

“Exactly,” we interjected, “We can adapt to that circumstance when it happens, and give you options.  Oh, and one more important thing,” we paused for a moment then continued, “If markets go really well and we were tracking far ahead of plan, we may take some portfolio risk off the table.  It may not be necessary to rely on markets as much to reach our goals, so why take the unnecessary risk?  But we’ll talk about it with you before we do anything, because you may have other priorities to consider together.  Likewise, if markets go badly we’re not going to sit on our hands.  We’ll discuss the implications and give you honest and decisive guidance about what you should do to stay on track.  In other words, our strategy will adapt to reality.  If it doesn’t, it’s not really a strategy.”

Gavin gave us a serious look, “I’m glad you’ve said that.  I mean, how can we plan now for the next 33 years?  I have trouble with five year plans at work – our business strategy needs to adapt to new realities each year.”

Nodding, we replied, “We know, and we agree.  It’s important to have a direction but it’s also important you know we’ll adapt to your changing priorities and plans.  It’s our job to give you financial options and ensure the options take into account your long term objectives.”

Gavin looks at us both, “That’s really good guys.”

With that, we give them the plan and the materials so they can consider them privately at home.  As they leave our office, they both look much less tense than they did when they walked in.  They now know they have real options and understand the implications of their decisions on the long term future.  That’s a big relief.

The next day, the phone rings.  It’s Gavin, “We had a long discussion and we want to go ahead.  We just had to make sure our lifestyle plans would work and I think we’re both happy with that now.  When can we come back in?  Let’s get started.”  Gavin paused for a moment then said, “Thank you guys, I feel so much more in control now.”

“Thank you, Gavin,” we respond. “Giving you a strategy to put you in control of your financial life is what we feel best about doing.”

 

Note: Gavin and Jenny are a fictitious couple but are based on the experiences of many clients we work with.