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Retirement Planning
By Gary Case

Published in the Idaho Press Tribune June 2011

Given recent capital markets history, it is difficult for many savers to muster the optimism to commit their money towards the types of investments that may best fit the timeframe and risk parameters necessary for long-term investing success. For those with more than ten years remaining before they will begin spending from their next egg, as well as for funds for current retirees that will be accessed more than ten years in the future, long-term market returns matter. Too often retirement nest eggs have too little exposure to asset classes (i.e., stocks) that can provide the returns necessary to accumulate sufficient retirement assets. To be sure, investment risk management is important-a relatively new metric for evaluating a manager's value is upside vs. downside capture ratios, which measure how that manager's risk management techniques reduce declines in poor market conditions as compared to a benchmark (as well as gains achieved during positive markets against the same benchmark). Ultimately, portfolios must have returns sufficient of provide an increasing income stream that accounts for inflation as experiences by seniors (not just the US Government version of CPI inflation). Portfolios must also reflect the risk tolerance of the saver. That risk tolerance should be expressed numerically, not simply in the relative terms of conservative, moderate, or aggressive.

Time horizons of less than ten years must necessarily be evaluated differently. Rather than investment returns measured in long-term market averages, the sequence of returns becomes much more relevant in shorter time frames, since a significant decline in portfolio value immediately prior to withdrawals or while funds are being spent from the account could mean failure of the next egg to provide the amount or length of income required.



Finally, when determining the amount necessary to be accumulated in a retirement nest egg, linear analysis fails to adequately illustrate real world experience. Simply assuming a portfolio will average X% annual returns may well illustrate an overly optimistic or pessimistic approach.
While it generally makes more sense to be an aggressive saver (put more money into a retirement account) than an aggressive investor (assume high returns will almost always prevail), a modeling approach that provides a statistical probability of achieving the goal given varying market conditions is inherently more valuable than a linear approach. A Monte Carlo analysis uses real world results, modeling multiple possible investment return scenarios and producing a statistical probably of success.

In summary, retirement planning should take into consideration the
. Other savings and spending goals with respect to their effect on retirement savings
. Long-term care and medical expense planning
. Final expense planning
. Tax considerations
. Life expectancy
. When appropriate, plan for inheritances
. Laddering the next egg via multiple buckets or pools of money
. Investment positioning/risk management necessary to achieve the goal
. Modeling accumulation and withdrawal using statistical probabilities (Monte Carlo)


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