If you’ve missed any of the recent articles in this series, “How to Retire”, you can click below to find the previous article links!
If you have achieved the main objectives in steps 1 and 2 by finding what you have to withdraw from in retirement as well as finding what your expectations are, you’re ready for step 3 – finding out where you actually are.
Many times, this is where clients fear they’re going to be let down by what their actual annual income in retirement will be, but that’s where we step in to either give a “thumbs up” or a “thumbs down” if expectation meets reality.
Today will be different than the previous two activities you’ve done, because it will involve some processes and technology we use on our side to find if what you have matches what you need and more importantly maybe – what you’ll need to start achieving in order to get there!
I have broken down today’s article into 3 parts:
- What you can do on your own
- Monte Carlo Simulation w/ Financial Planning
- Asset Map + Target Map for Retirees asking “how to retire”
- Predicting inflation over the next 30 years: What are your thoughts on this?
- Assessing insurance coverage for potential medical expenses: Do you have adequate coverage, or are you relying on your retirement funds to cover such costs?
- Estate planning: Do you have a will in place, and would it be beneficial to create an estate plan to avoid probate and reduce end-of-life expenses?
- Financial comfort in retirement: Are you satisfied with the projected income to sustain your lifestyle?
- Portfolio adjustments: Is it necessary to realign your investment portfolio to align with your retirement goals?
- Tax-efficient retirement distributions: How do you plan to withdraw funds from your retirement accounts in a tax-advantageous manner?
- Roth IRA considerations: Should you transfer any of your accounts to Roth IRAs for potential benefits?
These are just some of the key considerations, but they should prompt further reflection on your retirement planning journey.
There are plenty more considerations to make, but this would serve as a great starting point.
If you’re aware of your current assets and are comfortable making assumptions regarding the rate of return, future inflation rates, taxes, inflation-adjusted withdrawals, and the duration of the plan, you’ll be better equipped to formulate a comprehensive retirement strategy.
Monte Carlo Simulation with Financial Planning Focus
In the video above, I (Jordan McFarland) explain how we leverage Monte Carlo simulations to bolster your retirement plan and address the question of “how to retire” by considering both quantitative and qualitative objectives.
To illustrate, I use an example where I assume a $3 million portfolio, with annual expenses totaling approximately $150k for vacations, gifts to children, and living expenses. Given the complexity of this scenario, I believe that visualizing it through video demonstration is more beneficial for understanding.
Monte Carlo simulations are inherently more technical than the Asset Map strategy outlined in a previous video. If you prefer a visual strategy, I recommend watching that one instead.
It’s important to note that the simulation presented is just that—a simulation. While it provides valuable insights, we cannot guarantee 100% accuracy in these projections. However, they do assist us in planning for retirement with greater confidence. Here are a few advantages of using a Monte Carlo simulation.
- Risk Assessment: Monte Carlo simulation helps in assessing the risk associated with different outcomes of a given system or process. By running numerous simulations with random input values within specified ranges, it provides insights into the likelihood of various scenarios occurring.
- Decision Making Under Uncertainty: It aids in decision-making processes where uncertainty is a significant factor. By simulating a wide range of possible outcomes, decision-makers can gain a better understanding of the potential consequences of their choices.
- Performance Evaluation: Monte Carlo simulation can be used to evaluate the performance of systems, processes, or investments. By analyzing the results of multiple simulations, it allows for the identification of strengths, weaknesses, and areas for improvement.
- Optimization: It helps in optimizing complex systems or processes by identifying the combination of input variables that result in the best outcomes. Monte Carlo simulation can be used to find the optimal solution within specified constraints.
- Scenario Analysis: Monte Carlo simulation enables the analysis of multiple scenarios by varying input parameters and observing their impact on the outcomes. This allows for a thorough examination of different possibilities and their associated risks.
Asset + Target Map Walkthrough
Like the Monte Carlo simulation, Asset Map provides a projection of what a retired couple might anticipate before and after retiring.
Asset Map offers a more visual representation by illustrating a family’s net worth, and its planning tool, “Target Map,” is relatively simpler compared to the detailed Monte Carlo report.
Here are some key considerations to keep in mind when using Asset Map:
- Visual Representation: Asset Map provides a holistic and customizable visual representation of a family’s net worth, assets, liabilities, and goals.
- Simplicity and Efficiency: The planning tool, such as the “Target Map,” is user-friendly and streamlines the financial planning process, saving time for both advisors and clients.
- Collaborative Goal Setting: Clients can set and track financial goals collaboratively with their advisors, fostering better communication and decision-making based on clear visual representations.
- Risk Management: Asset Map helps in assessing and managing risks by identifying potential gaps or vulnerabilities in a client’s financial plan.
Overall, Asset Map enhances the financial planning experience by providing clarity, efficiency, and collaboration, leading to better-informed decisions and improved financial outcomes.
Well, that wraps up today’s discussion on “How to Retire.” If you found this series informative, we encourage you to share it with someone who might benefit from it. At Chapwood, we consider it a privilege to assist retirees in achieving financial confidence. If you’re interested in exploring how our services align with your retirement plan, please don’t hesitate to reach out to us today.
Wishing you a fantastic day ahead!
Jordan McFarland
jordan@chapwoodinvestments.com
Disclosure
Chapwood Investments, LLC is a SEC Registered Investment Advisory Firm. No mention of a particular security, index, derivative or other instruments in this material constitutes an opinion on suitability of any security. The information and data in this material were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this material. The guests appearing in material do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.
This statement is provided as a courtesy for informational purposes. Account values are collected from sources we believe to be reliable. Account values may be obtained from or verified through the institution(s) maintaining custody as well as from account statements issued by the custodian(s). Account values may be worth more or less when redeemed. Past performance is no guarantee of future results.
Calculators are hypothetical examples used for illustrative purposes and do not represent the performance of any specific investment or product. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk of loss. Actual results will vary. We strongly recommend that you seek the advice of a financial services professional before making any type of investment.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Core Consumer Price Index (CPI) measures the changes in the price of goods and services, excluding food and energy. The CPI measures price change from the perspective of the consumer. It is a key way to measure changes in purchasing trends and inflation.