As retirement nears, people need to transition away from a philosophy of asset accumulation to a strategy for utilization of assets to provide a stream of income that matches up to living expenses. And, where markets allow, there must be sufficient return to cover inflation. This is sometimes spoken of in terms of “Goal Oriented Investing”.
The “goal” is the amount of annual living expenses not covered by social security or income sources such as rental income. When divided by the size of the investment portfolio, it tells you the rate of return you need to achieve in order to match up to your annual living expenses. For example, if a person has an annual living expense of $40,000 and they receive $20,000 per year in social security income, then their $500,000 portfolio of investable assets must return 4% per year to match up to their annual need. If the person in our example is 65 years of age they must also allow for inflation and some how understand what probability of success they are likely to have in meeting their target need, as adjusted for inflation, over an expected retirement of 25 or more years.
It is not enough to rely solely on historic returns analysis. A decade ago, the casual observation would have been that stocks return 10% per year and bonds 6%. Clearly, that has not been the experience over the latest decade.
A better and more professional approach is to incorporate Capital Market Projections (CMP) into the analysis. A good CMP is a forward looking evaluation of the current economic environment and outlook, providing both a return and a risk forecast for each asset class to be utilized in an investment portfolio. The CMP is tested against history for reasonableness, but it is grounded on present circumstances. In addition to a simple forecast of the most likely outcome, the CMP will attach a range of expected outcomes which are both better and worse than the forecasted median return for a given mix of assets.
Prudent investing is driven by process. The process of incorporating CMP into ongoing retirement planning helps to test whether the “goal” can be met with a reasonable probability of success. If it appears that the goal cannot be met while still maintaining an appropriate risk profile, then living expenses should be adjusted downward, or retirement should be deferred.
Prudent investing involves the analysis of your current portfolio and the utilization of CMP to design a portfolio mix that balances risk and return at a level that is comfortable for you. This should be supplemented by a formalized investment policy, followed by implementation of that policy and ongoing monitoring of results versus the range of expectations.
The Hills Bank Trust and Wealth Management Group assets exceed 1.4 billion, with Trust and Wealth Management Officers located in both Johnson and Linn counties. We invite you to schedule a meeting with one of our experienced Trust and Wealth Management Officers by calling 1-800-899-8858 or visiting us online at HillsBankWealthManagement.com. We look forward to serving as your trusted advisor.Investment products are not a deposit, not FDIC insured, not insured by any federal government agency, carry no bank guarantee, and may go down in value.