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In our next scenario, we will illustrate the potential impact on a plan when negative market performance hits a portfolio near the clients ideal retirement age. Intuitively we know that a contraction in nest egg assets, similarly to what has happened so far in 2022, will reduce a plans confidence number. The questions then become: how to measure the negative impact? & what steps may be taken in order to get the plan back in the confidence window?
To set our scene, John and Jane are 64 years old and planning to retire next year at 65. They have a net worth of $2,865,000 and have established some spending goals and plan to downsize homes when they reach 72. On the income side, they are figuring to have $76,000 annually from Social Security benefits and a pension from a previous employer. This leaves a $72,000 gap, necessary for their nest egg assets to provide, when figuring for their desired retirement spending. Using an assumed rate of return at 6.11% annually, Moneyguide Pro produced a 79% probability of success falling comfortably within the desired range of 75 - 90%.
To showcase retirement year risk we will manually change their investable assets lower to reflect a 20% decline in value. Unfortunate timing is sometimes inevitable, as those who are/were planning to retire anytime within the last 8 - 16 months know firsthand. For John and Jane this scenario drops their retirement nest egg down from $2,330,000 to $1,779,000, immediately reducing their probability of success by 27% down to 52%. It's an unfortunate reality that bad market timing can force tough decisions to be made for clients. As advisors our goal is to help clients weigh the options necessary to return their plan back into the confidence zone.
Viable options we would present to John and Jane to consider:
As your advisor it is never fun to recommend delaying retirement. For some reason it is a more difficult decision for clients to reduce spending once they have already retired compared to if they had become unemployed and had a reduction in income. Therefore, oftentimes the more palatable choice is to delay retirement.
Stay tuned for the next case study with John and Jane!
Lee has been with H.I.S. since its inception in February of 2011, and is a local native to Northwest Arkansas. Under Jim’s apprenticeship he has gained experience in the areas of wealth and risk management and client services. He...
Jared joined H.I.S. in May of 2013 after graduating with a BA in Personal Financial Planning/Risk Management from the University of Central Arkansas (summa cum laude). He is a financial advisor and partner at HIS.