MEDICAL/LEGAL
ACHIEVING THE WRONG GOAL: RETIREMENT PLANNING FOR THE 21ST CENTURY I thoroughly enjoy mountain climbing as a hobby of mine. There are gorgeous landscapes to be seen, rigorous physical endeavors to conquer, detailed planning to account for, a team of professionals you must rely upon with your life, and a journey that’s never the same for anyone, even if they’re on the same climb. As you plan to enter retirement and live off the assets you’ve accumulated, the journey is very similar to climbing a rigorous mountain. You might want to travel to see beautiful landscapes, have goals you want to conquer, definite details you must account for with your finances, hopefully a team of professionals you trust with your financial life, and although you are entering this journey with 10,000 other people every day, no person’s trip is the same as another. However, while the similarities are striking, there is one distinct difference when talking with those that plan for the mountain climb and those that plan for retirement. What exactly are they planning for? Mountain climbers know; but do individuals or even their financial advisors? Think about this question: What’s the most important part of climbing a mountain? Most people, many of whom haven’t climbed mountains before, think of the peak and answer, “Getting to the summit!” Now, if you asked any professional climber, they’ll tell you that is the wrong goal. The right goal of any climb is to get home safely. With retirement, the right goal isn’t building up enough money, it is not running out of money with an undetermined lifespan. The question is then, how can we set ourselves up for success for the right goal in retirement, and put ourselves in the best position to not run out of money? One school of thought came out many years ago. Some people got together and proposed the “4% Rule.” The idea is that you can pull out 4% of your portfolio, adjusted for inflation, and be in an above
90% success rate for not running out of money in a 25-30 year retirement. This idea has established itself as a great rule of thumb for people trying to plan their retirement. The danger, though, is that this rule no longer holds true. Recently, Dr. Wade Pfau, Ph.D., CFA, a Professor of Retirement Income at The American College, and other economists have pointed out that the 4% Rule no longer provides a high success rate of not running out of money. This is due to changes in technology and the financial services industry, lack of pension plans, and longer lifespans. For reference, please check out Dr. Pfau’s white paper, “Optimizing Retirement Income by Combining Actuarial Science and Investments.” Economists now believe a “safe” distribution rate is between 2.5%-2.7%. Put this into perspective: For every $1 million of capital you have, you can spend between $25,000 and $27,000, adjusted for inflation, annually. If this seems awfully inefficient, your feelings are not without merit. This is where actuarial science, as Dr. Pfau illustrates, helps create efficiencies for the right goal in retirement planning. If planned for carefully, we can move the needle on that distribution rate using the same science that insurance companies have used for 200+ years. In today’s financial environment, it’s no longer “investments vs. annuities vs. insurance.” Just as the successful Coca-Cola said a few years back, it’s the power of “and.” As mentioned in the beginning, each person’s journey is highly individualized, even on the same trip as someone else. As always, work with your professional advisor(s) and tailor your plan for you. There is no silver bullet that will work for everyone in every situation. Ask your advisor(s) to lay out your distribution plan, even if you’re in your mid-30s. That’s the right retirement goal for which to aim. Contributed by Tyler Huston, CFP®, AEP®, CLU®, ChFC®, CASL®, Pyxis Advisors, 850-629-7220 or THuston@financialguide.com. CAP SCAN - A CAPITAL MEDICAL SOCIETY PUBLICATION 23