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Two simple questions: What is important to you and your family and what can you control? Find direction and build your retirement plan where these questions intersect.


Use the Retirement Planning Equation to Help Move Closer to Your Goals

  • Brian D'Orazio
  • 5/30/2019

Regardless of when you plan to retire, the first step to financial independence is understanding the retirement planning equation. It can be applied at any age, to any financial goals, at every stage of life: wealth accumulation, wealth preservation, or wealth distribution.

The equation is actually quite simple. It starts by breaking down the universe into two categories: things that are important to you, and things that you can control.

Retirement Planning Equation

Things that are important to you

A retirement that fits your financial goals and values

Let’s dream a little. If money was not a restriction, how would you spend your time in this next chapter of your life? What would a typical day look like and who would you spend it with? There is no right or wrong answer to these questions. However, the answers may help us identify and prioritize your goals into your needs, wants, and wishes. Or we could classify your goals into non-negotiable and negotiable categories based on what’s most important to you and your family. For example, leaving assets for your children or grandchildren may be an absolute priority, while your charitable giving goals are more flexible.

Factors that affect market returns

Equity valuations are currently at historical highs and interest rates are near all-time lows. At the same time, the United States and China are in the middle of trade war with both parties increasing tariffs on imported goods. We can debate how these actions and events will impact investment returns now and in the future, but the magnitude and timing of their impact is unknown. The expected rate of return and the range of returns are important factors to consider when planning for retirement.

Things that you can control

Balancing saving vs. spending

It’s the timeless trade-off: spend today or save for the future. Most advice is geared toward reducing spending today to increase personal savings. This may or may not be necessary in your situation, but the key is to strike a balance. With proper planning and financial modeling you should be able to make an informed decision on the appropriate amounts.

Many are choosing to work longer or phase into retirement by reducing the amount of time they work over a period of years.

Rethinking employment earnings and duration

The stereotypical “retirement picture” assumes that you will retire from your career or business and never again have any form of employment income. While this may be true for some individuals, many are choosing to work longer or phase into retirement by reducing the amount of time they work over a period of years. You may want to consider the financial aspects of this option as well as the physical and emotional benefits.

The retirement planning equation

A retirement plan focused on things that are important to you and things you can control may significantly improve the odds of you attaining your financial milestones. There are four variables that come together at this intersection:

  • Creating a financial plan — This plan will define your financial goals and the values that are important to you. In addition, it will help identify where you are today and outline a path of actionable recommendations to help achieve your ideal retirement.
  • Managing risk — There are two sources of investment risk: market risk and idiosyncratic risk. Historically, investors have been rewarded for assuming a certain level of market risk. Idiosyncratic risk, which effects only certain categories of assets, can be mitigated through portfolio diversification. Once you identify the required rate of return to achieve your financial goals, construct an investment portfolio that is broadly diversified. You may want to consider the benefits of non-liquid, alternative assets in your portfolio.
  • Managing investment expenses — There is an indirect relationship between investment expenses and your rate of return. There is a wide range of expenses to consider, including, but not limited to: transaction fees, redemption fees, distribution fees, expense ratios, front-end loads, back-end loads, and investment management fees. It is critical to understand the expenses associated with the investment vehicles within your accounts, as well as any expenses you are paying to your financial professional. If you are able to reduce your investment expenses, it will immediately impact your return in a positive way and increase the likelihood of you being able to reach your financial goals.
  • Minimizing income and estate taxes — We have all heard Benjamin Franklin’s famous quote: “Nothing is certain except death and taxes.” While this may be true, there are actions you can take to improve the tax efficiency of your investment portfolio. If you are in the accumulation phase of life (advancing your career and/or building a business), you may want to consider the appropriate saving and investment vehicles — some investments may provide tax-deferred growth or tax-fee distributions. If you are in the distribution phase of life (when you retire and start collecting on your earlier investments), developing a tax-efficient distribution strategy is important. But regardless of the stage of life, some tax strategies to consider include asset location, tax-loss harvesting, and municipal bonds that generate federal and state tax-exempt income. And let’s not forget the estate or “death tax.” If you have legacy goals, recent tax reform has created unique planning opportunities to transfer wealth to the next generation.

How we can help

The hardest part of developing a retirement plan is starting the process. Know that you are not in it alone. CLA wealth advisory professionals can work with you regardless of your income, net worth, or stage of life. Our advisors are salaried, so they can spend the time to get to know you and your goals. Then we can help you develop a goals-based financial plan from an objective and unbiased perspective.