The Truth About “Retirement Planning”

The 2020 Mind Over Money survey (1) finds that 77% of Americans feel anxious about their financial situation, with 68% concerned mostly about having sufficient income during retirement.

They should be.

You pretty much get one shot at saying “I quit” to your employer.  After the retirement party is over and the “Good Luck” balloons hit the floor, there’s no going back; and if your retirement calculations lacked accuracy or your analysis lacks comprehensiveness, you may regretfully find yourself searching the “help wanted” ads.  The accuracy of your calculations must be absolutely sound, and seeking professional expertise is a wise move. The 5 factors of the Time Value of Money (TVM) calculation serve to prompt 5 critical considerations

pv: present value       how much have you accumulated for retirement?
pmt: payments          how much will you put into/take out of these assets?
i: interest                      at what rate of return will the assets grow?
fv: future value           how much will you have at retirement?
n: time                          when will you retire?

Given any 4 of these factors, a Time Value of Money calculation can solve for the 5th.

Unfortunately, most “retirement planners” in America get paid to sell products and accumulate assets, not to perform TVM calculations; which is why many of them will offer you a “free” computerized presentation that employs some lazy rule-of-thumb to illustrate a “draw-down” of assets over your retirement years.

I recall December of 1997, when the phones at our Fee-Only firm lit up with Florida Power & Light (FPL)(2) employees seeking advice following the offering of FPL’s early retirement package. Knowing that FirsTrust does not accept sales commissions or marketing incentives, many FPL employees turned to us with concerns about conflicting recommendations they had received from local brokers and insurance agents: “penalty-free” early retirement strategies that directly contradicted the US tax code, blind IRA roll-overs with no mention of the Qualified Plan benefits that would be forfeited, and expensive annuity products with a principal “guarantee” of actually nothing more than the rep’s sales commission.

The additional considerations that produce a comprehensive retirement analysis are your personal metrics and preferences that directly impact the 5 Time Value of Money factors. Everybody’s plan considerations will be different, but many are relatively common:

1. Marketability: how quickly can long-term assets be turned into net cash?
2. Taxes: should net cash come from income investments or realized capital gains?
3. Risk: should/would you take more investment risk than necessary to achieve your desired lifestyle?
4. Liquidity: do you plan to use the equity in your house as retirement income?
5. Other income sources: will you have 1099 income, pension funds or inherited assets?
6. Social Security: how much do you expect to have after taxes and Medicare deductions?
7. Healthcare: what medical expenses will you have beyond what is provided by Medicare?
8. Inflation: do some things experience a higher rate of inflation (education, healthcare, etc.)?
9. Longevity: are you comfortable that your income won’t die before you do?
10. Travel/gifts/entertainment: trip to Italy? College education for grandchildren?

Bottom line:

You can choose your retirement lifestyle in advance or settle for whatever you can get if/when you arrive.

Choose wisely.

Author: Michael T. Koenig, CFP®, J.M., the Founding Partner of FirsTrust, LLC, candidly shares his 35+ years of experience as a financial advisor to advocate truth and transparency for financial service consumers. He holds a bachelor’s degree in Psychology, a masters certificate in Finance, a Juris Master of Law degree, and the CFP® Certified Financial Planner™ professional designation.

1) Mind Over Money. The Decision Lab (TheDecisionLab.com) (1/27/2020).
2) Florida Power & Light Company; a subsidiary of FPL Group (NYSE: FPL)