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November 09, 2003 at 07:00 PM
When it comes to financial planning, people generally want the same things as they reach their older years.
They would like an income that will support the lifestyle they desire. And they would like to leave a solid portion of their assets to their heirs or to a favorite charity when they pass away.
The first question I usually ask clients to consider is how much money they will need on a yearly basis and what rate of return they think they need to create it.
Of course, that rate has to be matched against the corrosive effect of inflation, which people usually havent taken into consideration. Even if inflation were to remain low for a clients lifetime (an unlikely event), it still can eat away a substantial portion of a persons savings”when one is not looking,” as it were.
Timing is everything, according to the saying. Where retirement is concerned, clients need to realize that rates of return on equities can vary dramatically from year to year.
The last few years have re-taught that lesson to many clientsand advisors, too.
So, assumptions about adequate rates of return have to include planning for years when the rate of return is far below the needed level and below the “timing of return risk” associated with withdrawing from portfolios at various points in time.
For example, a client needed a 9% average rate of return for 30 years, beginning in 1970, to sustain income. Then why did the client go broke in 1985, when the average rate of return of the S&P actually was 13% over that span? Because returns for certain periods during that time frame were much lower. The long haul has peaks and valleys, and if the valleys come in the early years of retirement, it can be a catastrophe.
In building a strategy for success, I always recommend plans for my clients that incorporate annuities, bonds and dividends.
This approach provides a mix of income production from a variety of sources. I think its important to balance fixed income stability with a portion of assets in growth to ward off inflation.
I also ask certain clients to consider carefully the possibility that an income for life annuity should be part of the plan, as well. Initially, some clients are put off by the expense ratio of this type of product. That is, they are put off until they realistically assess what is at stake and the solutions the product offers.
