Home' Trinidad and Tobago Guardian : September 28th 2014 Contents SBG20 PERSONAL FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 28 • 2014
The big day has finally arrived. No more
waking up early to battle your com-
mute, keeping up with endless e-mails,
fighting to make it to the top of the
corporate ladder or leaving the office
at 7 pm. You finally made it to retire-
ment with a sense of security that your assets will
provide you enough income for the rest of your life.
The only barrier to cruises and endless tee times
is figuring out which assets will be distributed first
and setting reminders to distribute those assets annu-
ally. The following three questions will give you the
answers to get the most from your retirement dis-
1. How much do you spend?
When I use the word "budget," clients usually recall
the days of ramen noodles and peanut butter and jelly
sandwiches. Since then, many people haven t had a
strict budget to guide their spending because most
of us have learned to live without one. Freedom from
work may give us time to celebrate, but outlining a
budget is crucial to success in retirement.
Of the thousands of clients that I have met with
over my career, I would place the number that have
had a budget and lived by it to less than 20. You may
have been able to overcome income shortfalls during
your career by postponing a purchase or opting for
a cheaper version of the product. But when your
retirement income is driven by investable assets, you
better have a good understanding of what your expens-
es are and where they can be reduced, if necessary.
Before completing a financial plan, I recommend
all of my clients give me an average of what they have
spent per month for the past two years. They can do
this by completing the "24-month checkbook drill,"
or looking at their checking account statements and
averaging all the monthly withdrawals. They can also
use an application such as those on Mint.com.
Either way, your expenses are one of the biggest
areas you control in retirement and if you don t have
a solid understanding of what they are, the value of
a financial plan could be compromised. Without
knowing how much income you need to withdraw,
you can t really know how much you need to make
on your investments.
2. What is your required rate of return?
Knowing how much your portfolio needs to make
is extremely important. For instance, let s say that
you have a portfolio value of $1 million and you require
distributions of $40,000 to live on. With inflation
and taxes you would likely need 6.0 to 8.0 per cent.
Most often, however, I see clients take on excessive
risk because the majority of their assets are invested
in equities and their "conservative" assets are in bonds,
which are in a bubble.
The result is that there is too much risk throughout
all of their investments with little downside protection
in the event of a market downturn or a prolonged
recovery. Your investment allocation has to take into
consideration many factors, such as time and risk
tolerance, but knowing what your required rate of
return is will also guide what your risk tolerance
should be. More importantly, it can dictate what your
investment allocation should be.
3. When do you need the money?
Investments can be categorised into different time
horizons based on when the money is needed and
on economic conditions. For instance, my firm has
several clients who like to have one year s worth of
income be as liquid as possible. Most often, it is held
in cash or money market funds. This gives them the
peace of mind they will be able to meet their needs
independent of how the market performs.
I think that six months expenses held in cash is
fine, but the point is you shouldn t place money that
will be needed in the next six months in a risky invest-
ment such as a small-cap tech company. Instead,
your investments can be segregated into different
asset classes based on different time horizons. This
composition will be entirely based on your financial
plan, but knowing that your investment strategy mir-
rors your retirement needs will bring you comfort.
Once you have married the time horizon with your
investment strategy, you can determine which invest-
ment vehicle will best help you reach your goal.
It also can make a huge difference in the growth
of the asset itself, since the principal and any gains
will never be taxed after deposit. This exercise is
something anyone can do with enough time, but a
seasoned retirement planning specialist can easily
assist you with structuring your investments.
Taxes, inflation and market returns are factors in
retirement that you will have little control over, but
will battle endlessly. Given that most people have a
likelihood of living 20 plus years in retirement, you
must have a withdrawal strategy for taking funds
from your retirement accounts in order to have a
fighting chance of making it to your last day with
money to spare.
The same "rules" used during your working years
to accumulate capital can t be relied upon to help you
ensure a perpetual income. Follow the rules listed
above for a good starting point to building your with-
drawal strategy. Also make sure to consult with a
retirement planning specialist for questions about
your options or the validity of your approach.
Financial experts con-
stantly sound the alarm
that people are saving
too little for retirement.
What they rarely talk
about are the effects of
spending too little.
How do you know if you re under-
spending in your retirement years?
One likely sign: You re spending so
little that you have a near 100 per cent
chance of never running out of money.
Nobody is advocating going on an irre-
sponsible spending spree but unless
you truly have millions or are deter-
mined to leave a huge estate behind; if
you re that heavily resourced you prob-
ably can spend more than you are.
Underspending isn t necessarily a
problem, but if it results in excessive
thrift, it can produce some unpleasant
and unnecessary side effects. Each of
the situations below is a sign that you
not only can afford to be more generous
with yourself; you probably need to be.
Substandard medical care: You
can buy generic green beans
and maybe a used bicycle, but
skimping on medical care isn t an
option. You saved all those years for
situations like these so get the best and
most appropriate care regardless of cost.
Nothing is more valuable than your
health and your life.
Insufficient insurance: Stud-
ies show that your medical
plan will pay an average of
half your medical expenses. As you age,
spending on healthcare will likely
become a significant portion of your
budget. Paying an extra premium to
receive coverage or other supplemental
insurance is money well spent.
A subpar mattress, etc: If
you or your spouse have a
bad back, shell out a couple
of thousand for a better mattress. And
that s only one example. How about a
personal trainer to keep you mobile and
healthy longer or treating yourself to
something you ve always fantasised
about? Continue scrutinising your
expenses, but just because an item is
expensive doesn t necessarily mean
buying it will make you run out of
money in a few years. If an object or
experience can improve your quality of
life, write the check if you can afford
it. Even if it s not a necessity.
Living like a recluse: Retire-
ment is supposed to be
about visiting friends and
grandchildren, traveling, going out to
eat---all those activities you couldn t
do when you were working all the time.
If you re not doing the things you love
because you re afraid of spending the
money, you might be saving too much.
And remember, the earlier you are in
retirement, the more likely you are to
be healthy and able to travel and still
enjoy spicy food and wave-surfing.
That may not always be true.
A withdrawal rate below 4.0
per cent: Most financial
advisers agree that the stan-
dard withdrawal rate, assuming you ve
adequately saved, is between 4.0 per
cent and 6.0 per cent. If you re taking
out less than that amount, it s time to
reap the benefits of making disciplined
financial decisions for so many years.
Spend more. See Strategies For With-
drawing Retirement Income for some
techniques to investigate.
Never giving yourself a raise:
Inflation is the great enemy
of almost everything, but for
a retiree, it s a friend. Why? Because
inflation allows you to give yourself a
raise each year. Let s say you withdrew
4.0 per cent of your $500,000 the first
year and inflation was 3.0 per cent
going into your second year. You can
give yourself another $600 in year two.
If you re not, you are able to spend
Still operating in saving
mode: There s no doubt that
our pension world encourages
living frugally; you need to ensure
you ve saved enough to retire comfort-
ably. But when you actually reach retire-
ment, your attitude should move from
saving and frugality to reward. Much
like finishing a giant project that took
a lot of hard work and sacrifice, you ve
reached the time to splurge a little. If
you re still in accumulation mode, it s
time to start living the life you deserve.
The Bottom Line
Nobody would advise you to spend
without good financial sense, and no
wise person would tell you how to spend
your money. What they will tell you is
that one day you will pass away and
you can t take your money with you.
You deserve to enjoy the fruits of your
If you want to give money to others,
do it now and enjoy their pleasure. If
you want to take a trip around the
world, get on the plane---and if you
want to purchase the car you ve always
dreamed of driving, now is the time.
(Especially that car; you can t drive for-
ever.) Being too cheap is no wiser finan-
cially than spending too much.
too little in
3 questions to ask before
choosing a retirement portfolio
Links Archive September 27th 2014 September 29th 2014 Navigation Previous Page Next Page