If you can meet three investment-related needs for retirement, you will have the formula for a secure financial future:

 

 1.  Substantial assets that produce sufficient income to fund your lifestyle during retirement and provide for financial security later in life.

 

2.  Competitive returns that produce the assets.

 

3.  Competent, trustworthy advice that produces consistent, long-term returns.

 

 

How Much is Enough? 

 

Most investors do not know how much money they will need for retirement or financial security later in life.  Such lack of awareness is a paradox because this target number is such a critical variable when planning for retirement.  One easy way to determine the monetary figure is described in a 2002 Charles Schwab study.  It concluded that you will need $230,000 of assets for every $1,000 of monthly income ($230 of assets for every dollar of monthly income, an annual payout rate of 5.2% during your retirement years).  At $5,000 per month in necessary income, you will need $1,150,000 of assets.  At $10,000 per month, you will require $2,300,000.  At $20,000, you will need to accumulate $4,600,000.   Aggressive investors can target less, but not by much for certainty that the money will last, keep pace with inflation, and have the potential of residual to pass your heirs.  The study also found that sometimes less initial principal was needed to achieve these goals (especially when the markets had significant positive performance with low volatility during the initial retirement years).  The study made the assumption you will spend nearly as much at age 80 as you do at age 65; however, if you have low expenses and are in good health, your spending needs may decrease later in retirement.    

 

Longevity is one of the primary reasons that creates the need for substantial assets.  According to the Annuity 2000 Mortality Table, the joint life expectancy of a couple at age 65 is 92 - a horizon of 27 years or more if you retire at age 65.  There is a 25 percent chance one partner will live to age 97.  Life expectancy has increased two or three years in just the past decade alone.

 

Pre and early retirees are just beginning to recognize the financial implications of living longer.  Unless you are a strong believer that there will not be major changes in the Social Security system, you will probably need substantially more asset value than your parents did if you want have a high probability of financial security later in life.  In addition, you may have to generate higher returns and take more risk for as many as fifteen years after retirement to protect your principal and purchasing power.  Running out of assets and returning to work at age 80 is simply not a viable strategy for most of us.

 

 

The need for substantial assets drives the need for significant investment performance.  This is based on the premise that most retirees will have no way to "save" their way out of financial uncertainty.  They will need significant performance in order to increase asset amounts - this is their only viable option for future security.

 

Over time, most of your increase in wealth will probably come from performance and not savings because the average returns on principal from retirement accounts is or will be larger than net income from pension and Social Security.  For example, suppose your one-year investment return on $500,000 was 10%, producing $50,000 in new assets.  This compares to a savings rate of 10% on your personal net income of $80,000, yielding $8,000 of new assets to invest.  In this example, 86% of your increased wealth comes from the investment performance.  As you can see, unless you have the unusual ability to save very large sums of money, performance is the critical component to a comfortable, secure retirement.  

 

The need to produce competitive rates of return on your assets does not stop the day you retire.  Your tolerance for risk may decline but the need to produce high single-digit returns is still a reality.  You will need performance to offset the principal forms of erosion -- distributions, inflation, and investment expenses.  Rising longevity exacerbates this problem, because the longer you live, the more erosion you'll experience especially from inflation. Your only solution is to increase your assets by an amount that produces enough return to offset distributions, expenses and the impact of inflation.

 

Contrary to popular belief, there are no free lunches when you invest in securities markets.  If you want to earn higher returns, you have to assume more risk.  If you are risk-adverse, you have to accept lower returns.  For example, if you were seeking higher returns, you would invest more of your assets in the stock market.  If you are satisfied with moderate returns, you would investment in both the stock and bond markets.  If you can only live with lower risk and are willing to accept lower returns, then you will invest in the short-term bond and cash equivalent markets.  

 

Even though investment scam representatives say that they have discovered a way to achieve high returns for low risk -- the ultimate free lunch -- it simply does not exist.  You will most likely have to earn at least an 8% to 12% return during your working years and a 7% to 9% return during the first two-thirds of your retirement years in order to achieve your lifetime financial goals.  Neither set of returns can be achieved with 100% of your assets invested in bonds.  A reality is that you have to invest in the complex stock market to achieve these returns.

 

Competent, Trustworthy Advice  

 

Investing is a time-consuming process because there are so many choices, massive amounts of data and continuous change.  If you are like most people, you do not have sufficient time to analyze market outlooks, researching alternatives, make investment decisions, monitor and replace managers, update your analysis, and monitor outcomes.  This is because you are busy in your career or enjoying retirement activities.  It requires substantial discipline to devote several hours per week to investment activities -- even more discipline than needed to exercise or eat the right foods in moderation.  Investing may be your hobby, but there should be nothing casual about the accumulation and preservation of retirement assets.  You need goals, a strategy, knowledge and time to be a successful investor.  If you not possess all of these things, then you need a personal financial advisor.

 

To achieve the performance you require from your assets, you will need competent advice from a professional whom you can trust.  This person must possess the requisite knowledge and have access to the sophisticated services in order to advise you on the optimum strategy for investing your assets.  This means that the advisor must have substantial knowledge obtained from formal education programs and years of experience.  The advisor must also provide objective, high quality advice that puts your needs ahead of his or her personal income.  Most importantly, the advisor must have a history of integrity.  After all, how valuable is investment advice you cannot trust?  

 

Advisors who meet these criteria are the exception, rather than the rule.  Most advisers sound good, but only a small percentage actually possess the qualities you need.  Your challenge is to obtain reliable information to tell you the good ones from the bad.  Then you can select an advisor who is qualified to help you achieve your financial goals for retirement.  

 

The best advisors comprise the upper echelon of the profession, sadly less than 5%. They possess the competence and integrity you're looking for.  They are well educated, have years of valuable experience, possess important certifications, belong to the right associations, and have clean compliance records.  Another 20% of advisors possess characteristics of both low and high quality advisors and are transitioning to the upper echelon.  These professionals are currently acquiring credentials, gaining experience, and evolving from selling commission products to providing value added advice for fees.  The remaining 75% of advisors are representatives who sell financial products for commissions.  They add little or no value to the investment process because value is not their focus nor is it the way they are measured or compensated.  They recommend particular products as a part of a sales process that is loaded with conflicts of interest, and it's up to you to identify them.  

 

This tremendous range in advisor quality is not readily apparent, and it makes sense for the industry to hide advisor ineptitude from you, because you would never knowingly turn your assets over to a weak advisor.  Consequently, that is exactly what millions of investors do every year because they base their decisions on advisor-controlled sales presentations instead of more objective criteria.

 

We highly recommend “doing your homework” when it comes to choosing an advisor that is right for you.  We encourage you to ask hard questions of us as well as any other advisors you are considering for your wealth management.