Seven years ago, we completed a retirement plan for a local couple. The plan laid down a track for the next 48 years when the youngest spouse would reach age 100. One of the most helpful characteristics of financial planning is that it specifies a track for the future so that clients know their status and location; they have real reference points year-by-year for knowing if they are on track or off track. We prefer to be conservative when planning the future for our clients, which is why we recommend a life expectancy to age 100. We would rather have our clients end up with more money in their plan than less.
Global stock markets began declining in the fall of 2007 and finally hit bottom in early March, 2009. This was the worst stock market crash since 1931, and it was certainly an event that would derail a retirement plan. But, how much is your plan off-track? If you don’t have a plan that specifies capacity to withdraw living expenses and specifies annual asset levels, you have no way of knowing what the decline in your portfolio means. In my experience, people who are willing to pay for professional financial planning are resilient people: they have a staunch acceptance of reality. They want to know what this downturn really means for them.
In the middle of the financial storm of 2008/2009 it was easy to become caught up in the zeitgeist of the culture in that moment. So many people felt like the world really was coming to an end. Now that the S&P 500 is up more than 24% since Jan. 1 and the rate of job losses has slowed significantly, the world did not come to an end. Throughout all of this turmoil, investors with a retirement plan have been able to ask and know how far they are off-track. The local couple I mentioned at the beginning of this column now know that their portfolio needs to grow by another 14.2% to put them back on track to year 2051.
Knowing is power. Knowing your financial status and location allows you to think and adapt effectively. The power of financial planning comes from distinctions such as your basic living expenses and your opportunities for discretionary spending. We work with clients to build and manage their base in the most solid way possible. And when their assets grow beyond their basic expenses, we help them to think about what the excess capacity means. How many trips abroad will the excess allow? We also help people face reality when they don’t have the assets for discretionary spending. Taking a year or two off from discretionary spending is not the end of the world. Power is being and acting who you are and not pretending and acting otherwise.
Jim Bell, CFP® is President and Founder of Bell Investment Advisors, Inc. 1111 Broadway, Suite 1630 in downtown Oakland. The firm has been providing personalized financial planning, investment management and career planning services since 1991. www.bellinvest.com 510-433-1066
Published in Piedmont Post on December 9, 2009