Four Simple Steps to the Complete Retirement

Posted by M ws On Monday, January 28, 2013 0 comments

Sometimes, it’s what the teacher learns from his students, rather than the other way around.

I’ll explain. I’m currently teaching an online course at Boston University about retirement. The students are working professionals from around the world, including Australia. Some are researchers, some financial advisers and some are working in the home office of big financial firms.

More often than not, I’m finding that I learn a thing or two about retirement that can be more than a little helpful to my readers. Here’s an example: Four simple but essential steps to creating the complete retirement plan.

Getting the right mix of assets, products and withdrawal strategy

Advisers are increasingly using software programs such as MoneyGuidePro and Income Discovery rather than pencil, paper and calculator to build retirement-income plans. And with good reason. These and other sophisticated software programs are taking much of the guesswork out of retirement planning.

With Income Discovery, for instance, advisers such as Rick Fine of Sensible Financial Planning will enter information about your three main types of capital: human (your earnings from work), social (Social Security) and financial capital (your taxable and tax-deferred accounts) into the program. In addition, advisers will enter information about your current and future expenses.

Fine also enters guidelines about what’s called a maturity-matched portfolio, a portfolio typically made up of bonds—in many cases Treasury Inflation Protected Securities or TIPS—that mature to meet future expenses. (In other, words they are using bond ladders, a way to make sure that you are matching certain assets against certain future liabilities.)

Part of this exercise also involves assessing whether you are willing to purchase income annuities to make sure your future expenses are covered, as well as getting a handle on your tolerance for risk, expected rates of return and the like.

Add that all together and the software will figure out the optimal combination of annuities for you to buy, how much to invest in your maturity-matched portfolio, and a systematic withdrawal plan (SWP) that will lead to a successful outcome, said Fine.

According to Fine, the cash flows generated are for the least successful of all possible successful outcomes. What’s more, the program also shows the failure rate, annuity purchases as percent of total assets, and maturity-matched portfolio as a percent of income.

For the maturity-matched portion of your portfolio, the Income Discovery program actually shows specific bond purchases right down to the individual CUSIP number of the security, the month and year of maturity, the number of bonds purchased, and total value, “so that we can actually implement the plan by requesting specific bonds through YieldQuest, or some similar company,” Fine said.

CLICK HERE for more by Rober Powell of Market Watch

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