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If you’ve recently thought about creating a retirement plan from scratch or updating your current strategy, it’s best to ask yourself some simple questions: When do I want to stop working? Will I have enough money to live comfortably when I do? What sort of risk do I want to take in my portfolio allocation?

It’s also a smart idea to consult with a financial expert or wealth management professional for some help. In a recent interview, Middleburg Financial’ s Senior Vice President, Managing Director, Paul Haines, offers some sound retirement planning advice, addresses recent concerns about the current economic environment, and explains the Monte Carlo Analysis.

When should someone begin to think about retirement planning?

The time to start is as early as possible. The earlier you invest the more opportunity you have for your money to grow. We find that the majority of people around the age 40 start to get very serious about retirement planning. The AARP recently did a study of folks age 50 and older to find out what their biggest financial concerns around retirement were. The top three answers according to the study were:

1. Lifetime retirement income plan. Will I have enough money to get by when I retire? 

2. Health care costs. How will I pay my medical bills? 

3. Can I live in retirement without the fear of running out of money?

An early start on the process can help plan for a variety of scenarios that may come up.

With the recent pandemic and economic crisis, has anything changed?

Not much has changed, especially as we have seen a modest market rebound. The three primary concerns I mentioned remain the same. We have been reaching out to Middleburg Financial clients to let them know where they currently stand with their retirement plan. Are they off track, or are they still good after the market volatility?  Assuming they now find themselves behind plan, we usually move to a Plan B type of process, which involves two steps.
 
  • The first step is to walk the client through the present situation, updating them in detail on how they are currently doing.  This also involves informing them of some what-if scenarios like a possible market rebound or job loss.

  •  The second step is to remind them about the Plan B options they chose when we first did the plan. What happens if you do not get the rate of return you need on your money, or experience a year of extreme loss?  Will you work longer, choose to live on less in retirement, or put more into retirement savings by better managing your cash flow?  It’s a simple process that revisits the same options with the client, no matter the market conditions. 
What does a good retirement plan include?
There are really five parts.

1. Retirement income plan. In this plan you want to make sure you are on track to retire comfortably.  

2. Managing cash flow. As you are preparing to retire, you want to make sure you are getting the most out of your money.  Are your accounts set up so you are generating enough cash flow to contribute to your retirement savings?  

3. Making sure you are investing properly. You want to get the rate of return you need to grow your money for retirement, while only taking a tolerable amount of risk to achieve that rate of return.  

4. Making sure you are protected; protected from an untimely death, disability, an unforeseen expense, or an emergency that can derail a good plan. In working with a Middleburg Financial Advisor, we make a list of all the contingencies: job loss, death, disability, a car accident, etc. We then come up with a plan to protect for each one.  

5. Creating a legacy. Once everything is in place, making sure that you’re in a place to meet all your goals, and having a plan to take care of all your loved ones as you wish.

How important is estate planning in the process?

Extremely. Just simple things like having a will in place or having your beneficiaries updated are important. Do you have children? Who will take care of them? These are important questions that need to be answered. Unfortunately, many Americans don’t even have a will. In my career, I’ve seen how smoothly things can go when clients have an estate plan. Conversely, I’ve seen how problematic the process can be when people haven’t taken even the simplest steps in their planning.

How can a wealth manager help get people on track to retire comfortably?

The most important thing we do at Middleburg Financial is to give people options and help them navigate the process to find what solutions work best for them. Let me give you an example. When it comes to retirement income planning, there are only a few levers people can pull to really effect their planning in a positive way. If someone says: I want to retire at a certain age on a certain amount of money, and I have this amount currently, and this is how much I am saving -- you only have a few adjustments you can make if you aren’t on track. Can I work longer? Can I live on less money in retirement than I had originally planned? Can I manage my cash flow to the point where I can put more into my savings? Can I afford to take on more risk in hopes of giving myself a higher rate of return? We can work with them one issue at a time, or all at once. It’s important to have options. The process doesn’t take very long, and, sometimes, fairly simple calculations can get a client back on track.

How should you set retirement goals?

Your number one goal should be about your money and feeling like you have enough of it. Another goal should have something to do with health care. Take an honest assessment of your situation. When do you want to retire? How much to you have saved? How much are you saving? Tools such as a Monte Carlo Analysis can help. (A Monte Carlo Analysis is a computer-generated risk management technique that is used for analysis of risks and outcomes)

How can the Monte Carlo Analysis help forecast?

We don’t know what’s going to happen in the future. We don’t know what the stock market will do, what interest rates will do, what inflation will do. We don’t know if someone will need long term care, which can be very expensive. A Monte Carlo Analysis takes someone’s situation and runs them through hundreds of random scenarios. It then assigns them a probability of successfully not running out of money in retirement, based on any of those scenarios, and how a person is invested. Are they going to make it or are they going to run out of money? If someone has an 80% probability of not running out of money, on paper those look like pretty good odds, right? What about when skydiving?  Do you make that jump if the parachute only has an 80% chance of working?  Suddenly, not so great odds.  The same thing pertains to retirement.  To some people an 80% probability of success doesn’t seem that great since it is likely impossible to jump back into the workforce 10 to 15 years into retirement. With any probability of success in a Monte Carlo Analysis, it’s really important to ask them “how do you feel about that?” and then give them the familiar options I’ve mentioned. Do you want to work a little bit longer? Do you want to spend less in retirement? Do you want to tighten your belt right now and save more, or do you want to take more risk to get a higher rate of return on that nest egg? All of these options are available to improve someone’s probability of success.

What do you tell someone who thinks they need to work longer?

I always suggest using a financial planning tool, like a Monte Carlo analysis to get an objective idea on where they stand in relation to this goal.  Some may be better off than they think.  The fact they have an awareness that they may need to work longer is a positive since that tells me that they already have a retirement plan goal. Many people have not taken the time to plan. 

Another thing to consider: people are living longer. Consequently, they might need to be working longer. If we did a “Family Feud” survey and asked 100 random people what was the age in which they thought people should retire, the number one answer would be, age 65. People really need to consider the fact that they may live into their late 80s or even into their 90s. Retiring at 65 might not be possible without proper planning and guidance. Part of retirement planning is educating people. The other part is showing people what their best options are for achieving desirable outcomes. 

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