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Turbulent Times Series Part 1: Gaining a Measure of Control in Retirement Planning


Darren L. Zagarola, CFP ® , CPA, PFS

As published in The Princeton Patch , June 21, 2012

Part 1 of 3 of the Turbulent Times Series

I have the privilege of teaching a class at the Princeton Adult School called "Retirement Planning in Turbulent Times." It's a pretty popular topic, which is not surprising considering the economy. While the recession has given many of those approaching retirement age a rough ride, baby boomers also face the reality that many can expect to spend as many as 25 to 30 years in retirement. This is very different than when Social Security was first established, when few people lived long enough to cash even one Social Security check.

Most students come into class with a preconceived notion that the world is different than ever before. They feel they have no control of their situation. As a result, they believe they will never be able to retire. Few have any real sense of the total picture. Retirement today, after all, doesn't usually mean "I want to stop working completely and play golf or watch TV all day." Individuals are redefining what retirement means on a daily basis. So I begin the class by letting them know that they can, in fact, control many of the things both now and in retirement that will determine their ability to successfully retire on their own terms.

So what's the best advice for baby boomers who are preparing for retirement, or who are five, 10, 15 years away from the age they hope to retire? The most important thing they should do is to define exactly what retirement means to them and determine their personal goals for life after retirement. Only then can they adjust their financial plan to meet their needs. To many, it's about having more balance and personal freedom. Most want to get out of their current job. They want permission to do what they want and a financial plan that will allow them to make it happen.

Retirement Cash Flow
When starting to think about retirement, individuals should be able to see how their investments are performing, where they will be at retirement both personally and financially" given their current situation, and how much they will need to meet their needs. This is called the retirement cash flow projection, and it centers around three main areas: A person's Cash inflows, cash outflows and overall need. Simply stated, cash inflows are earnings such as salary, Social Security benefits, pension income, and investment income. Cash outflows are living expenses and income taxes. The difference between the inflows and outflows is overall need. Overall need is supplemented by the earnings and principal of your investment portfolio.

So what can be controlled?

  • Earned Income: This can be controlled by choosing to work longer or working part time in retirement.
  • Social Security and Pension benefits: The amount of Social Security benefits and pension income can be controlled by deciding when to start collecting (collecting earlier means smaller payments over a longer period of time).
  • Pension Survivor Options: Individuals can control the amount and length of their pension benefits. Single life options provide higher benefit payments over one life and joint and survivor options provide lower payments over two lives. Survivor options include 100 percent, 75 percent or 50 percent to the survivor.
  • Living expenses: These can be controlled by changing your lifestyle to reduce expenses or choosing to relocate or downsize your current home.

Believe it or not, there are even ways to partially control the expected return from an investment portfolio. For example, if an individual has a pension of $36,000, Social Security of $24,000, and living expenses of $100,000, this means $40,000 a year needs to be found in the individual's portfolio. Here are three areas where a certain level of control over investment portfolios and their performance can be exercised.

  • Allocation of Investments
  • Minimizing tax consequences
  • Determining withdrawl rates from retirement fund

This column is the first of what I hope will be many monthly financial planning columns for the Princeton Patch. In next month's column, I will go into more detail on the type of control individuals can exert when allocating investments, how this allocation can help with market volatility, minimize tax consequences, and in figuring out the best rates for withdrawing funds from a retirement account.

Every so often I plan on devoting a column to answering readers' questions on financial planning and personal finance. If you have a question you'd like addressed, email me at [email protected] .

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk and other factors. Securities sold or redeemed prior to maturity may be subject to a substantial gain or loss. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

Over time you may earn a lower return from a bond ladder than you would from holding only long-term bonds, i.e. bonds that mature in 10 or more years. Liquidity may suffer under a laddered arrangement. Access to principal requires selling a bond, or not reinvesting the proceeds upon maturity which will break the ladder, shortening your portfolio's average maturity and reducing the income it generates. Please note that individual situations can vary. Information presented here should only be relied upon when coordinated with individual professional advice.