Jay D. Franklin

Planning for Retirement? Take Off Those Rose-Colored Glasses!

A recent article in the Wall Street Journal shows that the impending problem of people not having the financial resources that they will need to support themselves in retirement will perhaps be worse than anticipated. The problem is that many workers assume that they will receive substantial salary increases all the way up to retirement while in reality, “cost-of-living adjustments are about all they can count on after they enter their 40s, and a lot of people aren’t even getting those.” Although it may be tempting to assume that this is primarily a problem for lower-wage workers, “The stagnation in salaries has hit all varieties of workers, from executives to middle managers,” according to demographic experts and financial advisers quoted in the article. The problem, of course, is exacerbated by middle-age unemployment, from which recovery is quite difficult. The article gives several examples of people who were forced to switch jobs (or careers) past age 50, and all of them ended up with a reduced salary and the prospect of collecting lower Social Security payments than they may have originally anticipated.

All of the problems highlighted in this article make retirement planning even more challenging than it already is. To help investors in their retirement planning, IFA provides a complimentary retirement analysis based on a Monte Carlo Simulation. For someone who is still working, the questionnaire asks for current salary, the estimated annual percentage increase in salary, and the percentage of salary deferred into retirement savings.  IFA recommends that investors build in a margin of safety into their assumptions. For example, if someone age 38 got an 8% increase for the last three years, it is probably not realistic to assume that the 8% will continue until retirement. For someone who is close to retirement (say age 55 or above), it might be reasonable to put in current salary at 80% of actual salary to account for the possibility of a job change. Finally, when determining how much will be annually withdrawn from retirement savings, it is important to take Social Security and expected pension payments into account. You can obtain an estimate of your Social Security benefits here.

The results displayed in IFA’s Monte Carlo simulation are predicated on the assumption that investors are able to capture the returns of the various risk factors of the market. Numerous studies show that the investors most likely to accomplish this are those who invest in passive funds with the guidance of a passive advisor.