The pitfall of early retirement planning

January 16, 2009

The one constant in life is change. A successful retirement plan must take that philosophy into consideration.

The post-war baby boom has become the post-millennium retirement boom. Grandma and Grandpa put all their savings in bank certificates, and that was probably OK when the typical retirement lasted 5 or 10 years. Today’s prospective retiree, however, faces different challenges and a broad array of products and ideas.

Think back on the past 30 years: How much change have you endured? Family. Friends. Profession. Geography. Technology.

Would you be content living on the same salary you earned in 1979? The same car? The same house? Now gaze ahead to 2039. Are you willing to lock in financial solutions today? Even the best products in today’s marketplace are likely to evolve
during the next three decades.

Many smart baby-boomers seek concrete “answers” for retirement issues. They want questionnaires, spreadsheets, calculators, and, ultimately, a specific number for their own situation.

These are the tools of financial planning, and many of them can be found on investment companies’ websites, as well as at www.memag.com/calculators. Competent advisers can prepare extremely detailed reports on these exact issues. It’s not rocket science, nor is it secret technology.

But it’s also not a concrete answer. Investors rarely appreciate the complexity and folly of concrete answers. First of all, there are at least three huge questions that cannot be precisely answered:

How long will you live?

How will your investment perform?

What will be the rate of inflation?

These are monumental factors for determining anyone’s “number,” and yet they simply can’t be known in advance.

Add to these three the countless variables for each life circumstance-lifestyle, children, health, debts-and the entire process grows ridiculously vague. Any process that yields a concrete number is dangerously flawed, as is any plan that yields a concrete answer.

Perhaps another way to say this is that, while it’s possible to re-create an exact “number” upon a person’s death (by looking backwards), it’s impossible to accurately devise that same number going forward. That’s not exactly reassuring, but at least it applies to everyone.

Vagueness peaks as we approach retirement. People in their 50s and 60s must look forward two or three decades. Tiny variances in assumptions make huge differences over lengthy periods, so uncertainty plagues early planning. With each passing year, we replace one year’s financial estimates with hard data. We also bring more certainty to the lifespan question.

Certainly, there will be innovative products and ideas as this retirement boom explodes. My usual investment suggestion is a thoughtfully diversified portfolio using low-cost mutual funds. Not sexy, perhaps, but mostly understandable, predictable, and inexpensive. And, most important, extremely flexible.

Financial needs for retirement change throughout life, becoming more certain only in the later years of retirement. People seeking a concrete answer are advised to revisit this subject often.

Flexibility is the prime concern in achieving retirement success. A one-time “plan” isn’t likely to yield lasting results. The longer your time horizon, the more you’ll need to make adjustments along the way.

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The author is principal/CEO of Family Investment Center, a commission-free investment firm in St. Joseph, Missouri. The ideas expressed in this column are his alone and do not represent the views of Medical Economics.If you have a comment or a topic you’d like to see covered here, please e-mail meinvestment@advanstar.com.