View our January 2012 newsletter

Have you heard all those different statistics about how much you will need to retire?  “Statistics are like bikinis.  What they reveal is suggestive, but what they conceal is vital.  (Aaron Levenstein).

When you crunch the numbers and project what you will need for retirement, you must remember that the math never changes – it’s all about the assumptions that go into the math.

There are 4 critical assumptions that go into the retirement projection mix.  And the way you set your assumptions can dramatically change the bottom line.  What assumptions are we talking about?  Things like rates of return and cost of living.

Why should you care?  Just a 2% increase in the rate of inflation can more than double the amount of retirement savings you need. 

The 4 most critical assumptions:

• How long will you live?  (What happens if you outlive your estimates by 10 years or more?)
• What level of income will you need when you retire (or WANT when you retire – two different things!  )
• What should we use for a rate of inflation?  (If you are like me, you remember the double-digit inflation of the eighties)
• What will your investments return?  (Should we use the historical average?  What about volatility and how your portfolio is allocated?)

One thing we as planners have learned over the years is to always review and change our assumptions in light of current economic environments.   This is critical when you may live 20 or 30 years in retirement.  We also make sure we run several different scenarios with changing assumptions to see what the numbers tell us.  We find very often that a small change, such as working one or two more years, can have a very dramatic effect on outcomes.

A financial plan should be a fluid and changing thing.  You must review and/or revise it at least every 2-3 years (we do this annually for our clients) to adjust the assumptions, re-crunch the numbers and make necessary changes AS THEY OCCUR.

Bottom line:  There may well be a “magic number” for retirement – but unfortunately it changes!

Wall Street Journal Update on Debt Plan 7/19/11

Is Home Ownership Overrated?

Check out the latest investment & economic news from around the web.

• Weighing Your Options for Stashing Cash (via Wall Street Journal wsj.com 6/3/11

• Your 401(k): Leave It or Roll It? (via SmartMoney.com 5/29/11)

• Questions & Answers About Reaching the Debt Ceiling (via Wall Street Journal wsj.com 5/16/11)

• Unrest and changes in Tunisia and Egypt
• Civil war in Libya
• Protests in in Bahrain, Syria, and Yemen
• Earthquakes and tsunami in Japan and the ongoing nuclear challenges
• US kills Osama Bin Laden

Despite all this – our markets in January and February were solidly up, spurred by solid corporate profits and a broad consensus that while the global economy might not experience a fast recovery, it would continue to grow.  March saw a setback with the crisis in Japan and clearly Japan’s economy will suffer for some time – but our markets dipped and rebounded in a fairly short period of time.  The S&P 500¹ was up 9.1% through 4/30/11 with 12 positive months out of the last 15.²

Learn to Live with Uncertainty

So far, this has been a good year.  But will sudden events (might Bin Laden’s death result in more terrorist activity) change everything?  We just don’t know.  It is impossible to plan for developments that are by their nature, unpredictable.  In light of this, investors need to take away three key lessons:

1) Don’t overreact to the news. Often a one or two day decline may be followed by an upswing.

2) Expect the unexpected. The only way we know to deal with uncertainty is to build risk controls into portfolios.  We do this by:

• • Identifying your target mix of stocks, bonds and cash
  • Using assets that are less correlated to the stock market
  • Limiting exposure to any one company, sector or geographic region
  • Doing a periodic in-depth analysis of each portfolio to rebalance to the target allocation

3) Avoid Overconfidence.  There is one big negative to our risk-controlled approach to portfolio construction.  Someone at the water cooler or on the golf course will tell you how they made a “big bet” that has paid off and have earned a bigger and better return.  “Big bets” can result in “big losses” therefore we will not make “big bets” with your portfolio.  Our most important job is to protect your assets from the unexpected risks.

We believe that a balanced approach and a long term view will reward our clients.  Our approach may not be fun or sexy in the short term, but all the evidence at hand suggests that over time it can serve you well.

¹ The S&P is an unmanaged index of 500 stocks and is generally considered representative of the US stock market.   You cannot investment directly in the index.  Most client portfolios contain a combination of stocks, bonds and other investments – so this is not representative of your return.

² BTN Research