Retire Now?

What did the late King Prajadhipok, the last absolute ruler of Siam (now Thailand), do to prepare himself financially for life after his anticipated overthrow in the early 1930s? He took out unemployment insurance with French and British insurance companies. Then, having failed to suppress the newly formed constitutional government, he accepted his ouster, collected on the policies, and lived comfortably in England for the remaining six years of his life.

In the wealth management universe, some patterns are repeated. In the investment world, if the stock market is going up, people buy stocks. If the stock market is going down, they sell stocks. Thus, they buy high and sell low, which is the exact opposite of what they should do.

In the tax world, if a taxpayer in any one year owes the government money, he will adjust his income tax withholding so that he receives a gigantic refund every year for the rest of his life. Effectively, he gives Uncle Sam an interest-free loan year after year.

In the financial planning world, people retire when the stock market goes up, and people stop retiring when the market goes down. This is a repeat of buy-high, sell-low investing. If you retire when the market is up (it peaked in October 2007), there is only one way for the market to go: down. In effect, you retired with your assets high, but without proper planning, you may need to return to work when they are low.

In 2008 and through most of 2009, BWFA’s planning department saw a significant decrease in activity. It seems as if people were putting off retirement planning because the market had declined severely. But a poor stock market or even a recession does not necessarily mean that you should put off retirement.

In fact, our analysis can take into account variability in stock market returns by using Monte Carlo simulations in our retirement plans. These simulations randomize investment returns to measure the impact of market fluctuations on our clients’ retirement spending. We have found in these simulations that if the market performs poorly in the first two or three years of retirement, clients may not achieve their retirement goals. If the market performs well in the first two to three years of retirement, most clients will have little trouble achieving their goals.In effect, if you can retire during a down market, your retirement is much more secure.

Theoretically, it is easy to retire: all you have to do is put away 10% to 15% of your earnings during your working life. But try telling this to a young person who is saving to buy a car and repaying student loans. Try telling this to a couple purchasing a home, raising a family, putting kids in orthodontics, saving for college, and helping their parents. Often, saving for retirement is put on the back burner, and couples play “catch up” in their fifties.

In a world without pensions, individuals have an additional burden. Individuals are not only responsible for saving for their retirement, they are also responsible for making sure their retirement savings are properly invested and allocated.

If all this sounds like I am making a pitch for BWFA’s financial planning services, I am. Now is the best time to complete a financial plan to determine what you need to do to retire, meet your financial goals, and allocate your investments properly. Take a tip from King Prajadhipok, who knew how to plan for a down market.