By J. David Lewis 

A part of our work for clients is an annual review of how well each is financially prepared for retirement – either in the future or a continuation of their current level of withdrawals.  One of several calculations we make is an estimated probability whether enough of the investment portfolio will be available for as long as each client lives.  Needless to say, several assumptions are used to estimate these probabilities.

We think it is important to consider the assumptions at least annually, in order to avoid surprises.  If the expected outcome warrants concern, it is best to have an understanding of the risks as early as possible.  Changes in behavior can influence reasonable assumptions from year to year.  Maybe some stuff that has been considered essential is not quite so important in light of the impact on resources throughout one’s life.  Maybe life can be more enjoyable, because reasonable assumptions imply retirement resources are probably more than adequate.

In June 2014, we are finding that the probabilities for a successful retirement are mostly a few percentage points better than they were a year ago.  There are two fairly obvious contributing factors.  

One is a fact.  Securities portfolios have generally done well.  The S&P 500 Index return was 20.45% for twelve months ended May 31.  Investment resources are almost all larger, even for people making moderate to fairly aggressive annual withdrawals.

The other contributing factor for better retirement prospects is the model’s assumed life expectancy.  Clients have aged.  The model assumes approximately one year less is needed for the resources to support the lifestyle.  A larger portfolio and fewer years improve the probability.  So, if you used an online retirement projection a while back, and still have those results available, now might be an interesting time to see how your estimate has changed.

A more important management issue is what can be done with an understanding of your projection and its trend.  Imagine a situation where average monthly withdrawals were $3,000 in the summer of 2013.  Given the life expectancy, investments available and other assumptions, the estimated probability for a financially successful retirement was a frightening 25%.  Reducing average withdrawals to $2,400 per month, following that estimate, could increase the estimated probability to more like 80%.  A year later, we can see whether withdrawals have been reduced and estimate the probability now, in combinations with the other factors that affect the probability.

We consider around 80% our lower limits for comfort.  Probabilities in the upper eighties are much more comfortable.   From a resource management perspective, the benefit of monitoring such things is the possibilities for dramatically improved financial security.  The understanding may motivate a sustained change in behavior.  Monitoring is important for understanding whether efforts to improve security are successful.  Or, monitoring can tell us how serious a year of poor investment performance really is.

And, there is another way to consider the importance of our monitoring routine.  We have clients with probabilities over 95%, based on their actual annual withdrawals several years into retirement.  A question we want to explore with these clients is how they can use their resources to improve their lives.  In most cases, we are told “we have all we want now.”  If they know their probability hangs in the upper nineties for several years, maybe they can begin considering what they can do for important people around them and charities they intend to benefit in their estate plans.  If a gift will not threaten your personal security, why not watch the ways it improves circumstances for others while you are still living?

Contact J. David Lewis with DLewis@ResourceAdv.com. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.  He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  In 2013, he began a three-year term on its National Board of Directors.

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