“When you’re climbing the ladder, don’t forget the rungs.”—Unknown
2017 is a tough act to follow for investors. My suggestion is to temper market return expectations for 2018 and beyond. Many stock indices made considerable advances last year.
However, a new year is an excellent time to strategize. My recommendation is to begin sketching out the family’s retirement projection. This preparation aims to improve the readiness of the game plan. A projection that was crafted during the last five years may simply require an update.
It makes good sense to start the first projection around age 40. Ideally, you should plan on 15 to 20 years of sustained saving and investing before actual retirement. If you are already retired, the projection should confirm that you are in sync with your retirement goals.
My analysis provides a sense of direction for what a family tries to achieve. Here is what you need to prepare as you climb the ladder to retirement:
- The family’s retirement income needs.
- The starting age ballpark for that income.
- A longevity approximation for each spouse, say to age 90.
- A base inflation rate for consideration.
- A sustainable and realistic saving rate periodically added to the nest egg.
- A sense of additional health expenses that may be required.
- Dependable sources of the family’s retirement incomes.
- The family’s financial asset base now owned.
The projection is an assessment of the capital required for your retirement goals to become reality and be sustained. You need to come to grips with the possibility of retirement lasting 25 to 30 years, maybe longer. A critical factor is the implication of the portfolio receiving little or no saving capacity after retirement.
Return estimates 2018
I am of the view that long-term return estimates for 2018 projections be as follows:
|2018 Rate Estimates
||Risk-adverse investor profiles
||Balanced investor profiles
||Business risk investor profiles
||Aggressive investor profiles
Planning three or more decades of dependable retirement income is the new money management challenge. The projection brings to light several important facts. It starts with the capital estimate that achieves retirement goals and desires. Quickly followed by the periodic saving capacity expected by the investment plan.
A retirement projection allows the design of a customized investing road map tailored to each client. It also ballparks the annual return to reach and maintain the family’s desired retirement lifestyle. Not to mention whether those retirement goals are reasonable and suitable vis-à-vis family aspirations.
Many investors are not comfortable navigating their retirement math. One solution is to engage a professional well versed with financial projections. Wise investors start crafting the personal retirement projection early. Once the first projection is crafted, it typically needs revisiting only every three to five years.
Some investors may have to save more if they start later than normal. Everyone should also factor in possibilities of recessions, bear markets and unexpected events. After all, we are trying to deal with projections that provide a sense of direction. Some families may have to delay retirement further down the road.
I suggest starting with a sensible projection rate for the long haul. Resist the temptation to increase it just to make the numbers look better. It may give you greater reason to pause and reflect on the implications of the chosen rate. Adjusting the projection rate is easy; achieving it on a consistent basis is a far more difficult task.
Make sure the rungs on your retirement ladder are sized to your needs. One recurring assessment you will have to make is whether the nest egg will outlast the family goals.
I welcome your questions, feedback and comments.