Client Success Story: Retirement Hopes Become a Reality

Client Success Story: Retirement Hopes Become a Reality

When we first met with Phil and Nancy (clients’ names changed for confidentiality purposes), they weren’t sure if they could retire. As their financial planners, we had not yet taken them through the financial planning process, so we weren’t sure either. Phil was an IT professional who worked for the state government. He enjoyed his job, but he was ready for a change and wanted to retire. Nancy was a homemaker who enjoyed singing in her church choir. Phil was not a high income earner, but he and Nancy were frugal and did a good job saving over the years. Phil had a keen eye for details, and he asked us a lot of very good questions. One of Phil’s biggest concerns was deciding which retirement pension plan option to select at retirement. He also had questions about whether or not it made sense to purchase additional years of pension service credit and long-term care insurance. After analyzing Phil and Nancy’s finances in great detail, it became clear that their retirement plan could benefit from the purchase of additional years of service credit. We assisted them with this process, and we also helped them determine the most efficient means of funding that purchase. We further analyzed Phil’s pension, and we were able to advise him on the best pension payout option, one that would ensure that Nancy was protected in the event of Phil’s passing. Fast forward several weeks later when we met for a final review of their financial plan, and we were able to present some very good news. Not only was Phil in a position to...
7 Things Prospective Retirees Need to Think About

7 Things Prospective Retirees Need to Think About

Retirees face a variety of challenges as they enter retirement. Here are some broad talking points for retirees to consider: 1.) Daily life in retirement A big question involves how time will be spent in retirement. Retirement is no longer the “lazy boy” retirement that past generations envisaged. People are often working in retirement and spending time in a variety of productive ways. Boredom is a major concern for many retirees. 2.) Portfolio rate of return Many people don’t have a pension, so it will be up to them to design a portfolio that will generate enough return to last throughout retirement. This can be a daunting task, but one that the retiree needs to take seriously. 3.) Portfolio withdrawal rate Closely related to the portfolio rate of return is the portfolio’s sustainable withdrawal rate (SWR). The retiree needs to ascertain how much can be safely withdrawn from her portfolio in order to try to make the portfolio last for up to 30 years or more in retirement. Start out too aggressive and the portfolio could be depleted; too conservative and one could have a surplus. 4.) Life expectancy How long will the retiree live? Family background, current health, and other factors play into this discussion, but it’s important to start with a reasonable and informed assumption about life-expectancy. 5.) Inflation  Inflation is a major risk to retirees. The retiree needs to ensure that her portfolio is not eroded by inflation. Keeping a portfolio too conservatively invested can result in a portfolio being far from “safe”. 6.) Health care expenses Health care is a major concern for most retirees....
Dunston Financial Group in The Wall Street Journal

Dunston Financial Group in The Wall Street Journal

Dunston Financial Group is excited to share that we were featured in yesterday’s edition of The Wall Street Journal. The title of the article is “How Entrepreneurs Can Use IRAs to Finance Startups,” and it’s about how one can use IRA/401(k) money to fund a startup venture. Known as ROBS (Rollover for Business Startups) transactions, they definitely are not right for everyone, and they carry a unique set of risks. Nevertheless, in the right circumstances, ROBS transactions can be an effective business funding...
Retirement Income Planning: Is the 4% Rule Too Conservative?

Retirement Income Planning: Is the 4% Rule Too Conservative?

Turning a portfolio into income throughout retirement is a very different task from the accumulation phase of a portfolio. Many are familiar with William Bengen’s rule of thumb that found that an inflation-adjusted 4% withdrawal rate in a 50% stock / 50% bond portfolio would make a portfolio last for 30 years in the worst of economic conditions. But some have rightly wondered if Bengen’s rule is too conservative. Indeed, well-known financial planning researcher Michael Kitces ran his own models, and he found that …in the overwhelming majority of scenarios, returns are not so bad as to necessitate a 4% initial withdrawal rate in the first place. In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end of retirement, as retirees fail to spend their upside! This is interesting. This means that by withdrawing from one’s portfolio too conservatively in retirement, a retiree may actually not spend enough. A natural consequence of this might be that the retiree doesn’t enjoy retirement the way she envisaged, or worse, may not be able to meet her financial needs. It can also mean that the retiree leaves a windfall at death, something that may or may not be...
Making Retirement Money Last: A Summary of Withdrawal Strategies

Making Retirement Money Last: A Summary of Withdrawal Strategies

As prospective retirees near retirement, one of the most important things they’ll need to do is come up with a sustainable withdrawal strategy for the retirement assets they’ve accumulated. Importantly, this decision could determine whether or not one’s portfolio will run out of money. Here’s a brief summary of many of the methods available to retirees:  FIXED AMOUNT METHODS 1.) Constant Dollar Amount (adjusted for inflation each year) One method to accomplish this has historically been the “Income Portfolio” wherein a portfolio is invested in dividend stocks and interest bearing bonds. 2.) Fixed Percentage Amount (adjusted for inflation each year) – For example, William Bengen’s well-known 4% rule. Designed to address sequence of returns risk, the idea is that withdrawing 4% of a portfolio’s total value each year resulted in the portfolio safely lasting for 30 years (3.8% is the safe withdrawal rate if one does not want to spend down principal). The downside is that simply because a portfolio will last 30 years doesn’t mean that it will meet one’s income needs (i.e. 4% might be too low of an income). Additionally, research has shown that this strategy usually results in significant under spending. Nevertheless, this approach is widely known and still represents a helpful point-of departure for many practitioners when beginning to frame the retirement income discussion.   3.) Bucket Strategy / Evensky & Katz Cash Flow Reserve Strategy – This is a needs-based strategy that is a fixed dollar amount, but is also in conversation with the fixed percentage amount strategy. A financial planner works with a client to determine a realistic dollar amount that can...
Four Pillars of Retirement Income Planning and Why a Do-It-Yourself Strategy Might Result in Retirement Failure

Four Pillars of Retirement Income Planning and Why a Do-It-Yourself Strategy Might Result in Retirement Failure

  One of my colleagues in the financial planning business, Michael Kitces, recently wrote a really good article on the four pillars of retirement income in retiree investment portfolios. The gist is that dividends, interest, capital gains, and principal all make up important parts of a retiree’s income portfolio, and it’s critical for retirees to properly and efficiently manage these four sources of income from a total cash flow standpoint. Historically, investors have relied on “income” portfolios, and have mainly focused on dividends and interest, but capital gains and principal now play an equally critical role in retiree distribution planning. It’s my belief that the “income” portfolio is largely a myth and can actually increase the likelihood that a retiree will run out of money during retirement. This is because an “income” portfolio places arbitrary constraints on how the portfolio needs to be allocated, and it increases the risk that the portfolio will not sufficiently grow and be able to keep pace with inflation. As we work with retirees on a daily basis, it’s becoming increasingly clear that the accumulation strategy that got many retirees to the point of retirement should not be the same strategy that unwinds the portfolio and creates net-net cash flow during retirement (net of taxes and net of expenses). This, as Kitces rightly points out, is because managing interest, dividends, capital gains, and principal needs to be done in a tax-efficient manner: …ultimately, the modern retirement portfolio will really rely on four pillars for retirement income – interest, dividends, capital gains, and principal. Or stated more accurately, the four pillars of retirement cash flows –...