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BOSTON
— One year after the start of the crash, your 401(k)
or IRA is pretty much back to even, according to some
studies at least. Now you can get on with the rest of
your life, and with planning your future finances.
Rather than thinking about how much money you lost,
now's a good time to incorporate all the new retirement
research and possibly some new products into your plan.
Here's a
five-step plan for reworking your retirement-savings
strategy:
1. Think
about you.
It all
starts and ends with you, says
Mitch Anthony
, author of "The New Retirementality." No
matter whether you're a pre-retiree, a semi-retiree, or
fully retired, you have to think about what you want out
of life.
In
essence, you need to focus first on the life and
lifestyle you want and then the money needed to fund it.
"Too often, numbers and strategies are formed
outside of the very context they are intended to
address: our quality of life and our sense of emotional
well being," Anthony wrote in "Retirement
Income Redesigned: An Advisor's Guide for Funding
Boomers' Best Years."
"You
cannot number-crunch your way to emotional well-being
and quality of life, nor can you achieve these ends
without crunching the numbers and making the necessary
adjustments."
But how
do you figure out the life you want? "As we attempt
to build a bridge between means and meaning in our lives
we can ponder what
Viktor Frankl
, author of 'Man's Search for Meaning,' called the three
values of meaning: experiential values, creative values,
and attitudinal values," Anthony said in an e-mail.
Here are some questions Anthony developed around these
ideas that you can ask yourself.
Experiential:
—What
are some experiences that I have been putting off that I
can put on this year's calendar?
—Where
do I want to go this year, and who do I want to go with?
—What
beautiful place can I visit within a few hours of where
I live?
Creative:
—What
is it that I do that brings the most value to others?
—How
can I get better at it?
—Who do
I most enjoy working with?
—What
tasks are the most energizing? How can I spend more time
doing those?
Attitudinal:
—For
whom am I a role model?
—What
attitudes and behaviors do I want to demonstrate for
them this year?
—What
is the absolute best response I can bring to my present
challenges?
2. Your
household balance sheet.
With the
answers to those questions in hand, start to think about
the money side of what Anthony calls the "financial
life-planning" equation. There the first order of
business is getting a handle on your household's balance
sheet — what you own and what you owe.
Be sure
to create a balance sheet that looks at your entire
household's assets and liabilities, not just your
personal balance sheet. That's the first step in
creating a life-cycle plan, according to the
Retirement Income Industry Association
.
But in
the new, post-financial-crisis world order, this balance
sheet won't quite look like the one with which you're
familiar, the one with assets on one side of the ledger
and liabilities on the other. These days, assets still
include the usual suspects such as taxable and
tax-deferred accounts, but that column also includes the
net present value of your
Social Security
benefits and the discounted value of your future wages
— that is, your human capital.
"Your
human capital is the most valuable asset for most of
your working life,"
Moshe Milevsky
writes in "Your Money Milestones," due to be
published in January. And all forms of capital belong on
what Milevsky refers to as the "holistic"
balance sheet. "You must add your human capital to
your financial capital to truly understand your
financial position in life."
Likewise,
the liability side of your balance sheet looks a bit
different now. It includes the present value of your
minimum consumption or lifestyle needs in retirement,
the present value of any bequests, as well as funds that
could be used for other liabilities, including both
discretionary spending and unforeseen expenses. It
should also include what Milevsky calls hidden
liabilities. His rule of thumb: "Don't add assets
without subtracting any corresponding liabilities."
3. Your
cash flows.
The next
order of business is getting a handle on what your fixed
and discretionary expenses, plus your income sources,
will be in retirement. In an ideal world, you would try
to use your fixed sources of income (annuities,
Social Security
, interest income from bonds and CDs) to pay for your
fixed expenses or better yet your minimum standard of
living, "your floor," according to the
Retirement Income Industry Association
.
And then
you would use what some call your "risky"
assets to pay for discretionary expenses. In an ideal
world, you want a financial capital-to-consumption ratio
— say 30:1 — that makes it less likely that you'll
run out of money.
For his
part, Milevsky suggests you plan to spend your total
resources evenly and smoothly over time. You want to
"devise a long-term spending plan that spreads your
total resources over your entire life cycle." His
advice: "Think long-term and avoid foreseeable
disruptions by budgeting for all predictable
liabilities."
4. Assess
and manage retirement risks.
Long
before you start thinking about how to invest your money
given your desired lifestyle, your balance sheet and
your cash flows, experts say you need to factor
retirement risks into your retirement plan, including
but not limited to inflation, health care, and
longevity.
"The
big risks in retirement include outliving assets, health
care, long-term care and inflation," said
Anna Rappaport
, president of a consulting firm bearing her name and
chair of the
Society of Actuaries' Committee on Post-Retirement Needs
and Risks
. "Actuaries are particularly concerned that people
fail to think about the long-term and outliving
assets."
But you
have to think about these and all the retirement risks
— the
Society of Actuaries
has identified at least 15 — in a thoughtful way. As
part of this exercise, consider reading, for instance,
"Risk: A Practical Guide for Deciding What's Really
Safe and What's Really Dangerous in the World Around
You" by
David Ropeik
and
George Gray
. The authors suggest you assess whether the risk
involves an identifiable hazard, whether you have
exposure to it, whether the consequences are too severe
to ignore, and the probability of negative consequences.
Identifying
your retirement risks is one job, but managing them is
another thing entirely. You might decide to manage risks
through diversification, insurance, hedging, or
risk-free assets. The net effect of this exercise is
that you'll create a portfolio that has some percent of
assets allocated to each of those risk-management
techniques, with some percent used to create a minimum
level of consumption in retirement.
5.
Choosing the right products.
Once
you've figured out how much to invest in each bucket
based on all things considered — your desired
lifestyle, balance sheet, cash flow, and risks — you
can start thinking about which products should be used
to produce a minimum standard of living, and which could
be used for all else, or what the
Retirement Income Industry Association
calls "upside." For his part,
Michael Zwecher
, author of soon-to-be-published "Retirement
Portfolios: Theory, Construction, and Management"
suggests that some products can be used to build a
floor, such as
Treasury Inflation Protected Securities
, while others should be used solely for upside, such as
stocks, and still others could be used to for flooring
and upside, such as variable annuities with guarantees.
The key
point is this: In the post-2008 world, picking products
is the last step in building your retirement-income
plan.
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