Information provided is for illustrative purposes only and should not be considered investment advice. The information provided is hypothetical in nature, does not reflect actual investment results and is not a guarantee of future results. No reliance should be placed on any such information when making an investment decision. Nothing herein is intended as an endorsement by any person of Huber Financial nor should the information be construed as a statement of a typical client’s experience with Huber Financial. No guarantee of investment performance is being provided and no inference to the contrary should be made.
Today you’ll meet one of our clients, Jim and Kay, a couple who are struggling to find common ground and negotiate their different philosophies about work, investing and in-retirement spending. The story illustrates our unique approach to retirement planning. While the industry sees retirement as a final destination and asks, “Do you have enough?” We take a different approach and ask our clients, “What’s next?” because we recognize that today’s retirement is different. It’s a new beginning with unlimited opportunities and possibilities. Here’s an example of how we worked through this approach with Jim and Kay.
Meet Jim from Mars and Kay from Venus
Jim and Kay both grew up in modest households and worked hard to build a substantial seven-figure retirement savings over the last 30 years. Kay had a successful career in the pharmaceutical industry and Jim has grown an impressive marketing consulting business.
Jim is more of a risk taker and is confident that their seven-figure portfolio will be more than enough to support them. He has never wanted to get bogged down with budgets and spending limits.
Kay, on the other hand, feels that she can never have enough to achieve financial security and has a hard time spending money because she’s afraid of running out. She is retiring at the end of the year and doesn’t feel Jim’s calculations about their future cash flow are realistic.
With such different ideas about money and spending, this couple is in for a long and challenging road – financially and emotionally speaking – if every round of golf or expensive dinner out is met with a raised eyebrow. It doesn’t support the vision they have for the next chapter in their life.
Introducing “The Lifestyle Plan”
To help Jim and Kay, we worked through a simple, but important budget exercise called a Lifestyle Plan, which incorporates all the moving parts of their life, including personal goals, income and spending and puts it on paper in the form of a plan.
We started by helping them develop a list of spending goals, which were broken down into three categories: “Needs” (fixed costs, taxes, utilities, etc.); “Wants” (high level discretionary – country club memberships, eating out and gifts) and “Wishes” (lower-level discretionary – vacations and new cars.)
This exercise has a number of benefits. It’s flexible and can accommodate adjustments from year to year, if needed. Its flexibility allows Jim and Kay to look at their income much like their salary during their working years and provides the option of taking money out of their investment gains to pay off their house or take their grandchildren on vacation. It is a graded approach that prioritizes their spending. After this work is completed, Jim and Kay have an ‘on the shelf’ budget plan, and are reassured that most if not all of spending will be accommodated in a given year. The plan makes provisions for market volatility, health care costs or financial assistance for a child, which can take a bite out of their savings.
Another key benefit of prioritizing spending is that it gives Jim and Kay “permission” to spend within predefined boundaries. They can feel comfortable that their lifestyle spending is included in the plan. The budget was helpful to Kay, who is someone who feels the need to get permission to feel comfortable spending money. It’s simply a common sense approach that’s straight forward and flexible.
Like most retirees, Jim and Kay need three things from their portfolio — Liquidity, Income and Growth. Kay would prefer to simply “play defense” with their money, but they’ll need growth for the long term, and despite Jim’s optimism and free-wheeling attitude, they need to be insulated from and prepared for the ups and downs of market volatility. As a result, the couple needs a balanced mix of assets.
To manage these factors, we anticipated cash flow needs and apportioned Jim and Kay’s assets into three main “Buckets” that correspond with their needs. Here’s how we used each bucket to support their top three goals and support their Lifestyle Plan.
- Bucket Number One: Two Years of Cash – The Liquidity bucket includes short-term securities such as CDs, government bonds and money markets to fund two years of annual spending.
- Bucket Number Two: The Income Engine – The second bucket serves as an income engine and uses bonds and dividend-paying stocks to cover the most important spending in the Lifestyle Plan, or the “Needs.”
- Bucket Number Three: Growth – Looking Eight Years Ahead – We invest these assets, which represent approximately 50 percent of Jim and Kay’s portfolio, in the “Growth” bucket, which contains globally, diversified equities. Because these securities have the highest expected return and the most volatility and uncertainty it’s important to keep two concepts in mind. 1.) The “Liquidity” and “Income” buckets provide a buffer that lasts about eight years or more, protecting Jim and Kay from the inherent risks in their stock holdings. 2.) Because portfolio growth is inconsistent, we need to harvest profits as they come and use them to replenish the Liquidity bucket periodically by rebalancing and selling after periods of gains.
Now that we’ve allocated their portfolio into three buckets, Jim and Kay have a balanced, dynamic process in place to generate their retirement income. The couple can benefit substantially from long-term market growth, and be protected from short-term volatility. The income from the portfolio and their Social Security income comfortably covers their fixed spending. The remaining amount of their spending will come from the Liquidity bucket, which gets replenished periodically by portfolio gains.
When the Growth bucket experiences declines, Jim and Kay have enough in their Liquidity and Income buckets to see them through the next ten years. Depending on the severity or length of the downturn, we may talk to Jim and Kay about deferring some of their lower priority spending, or “Wishes,” from their Lifestyle Plan. The cash and bonds act as a buffer, shielding Jim and Kay from making severe adjustments in their lifestyle or drawing against their growth investments in the event of a sharp market downturn.
Over the next few years, Jim and Kay experienced a smooth transition into retirement. We’ve continued to meet with them periodically, reviewing their plan and portfolio and monitoring their cash flow needs.
As expected, now that Jim and Kay are getting settled, they’d like to make some changes. Jim is ready to formally wind down his work and replace his consulting income with Social Security. He’s pleased that his transition into retirement has gone smoothly. Kay has taken time to visit good friends, garden, and volunteer. Luckily, Kay isn’t working now and is able to help her mother recover after a recent health scare. While Kay is comfortable about their retirement, she’s now worried that they may need to supplement her mom’s Social Security by covering some of her increasing medical bills. This, in turn, could mean substantially more expenses than Jim and Kay had originally planned. She fears this could be a “game changer” and with markets hitting new highs recently, perhaps we should consider cashing in a portion of their portfolio to protect them, at least in the near term.
Jim and Kay will continue to need growth investments in their portfolio for the long run even though their short term needs have changed. Because we’ve “bucketed” their assets for the short term and rebalanced along the way, they currently have a short term buffer of eight years of spending. If their expenses go up to help Mom, this buffer is projected to last in excess of six years in a worst case scenario. Over time, they can review their Lifestyle Plan and determine if there are lower priority goals (Wishes) that they wish to defer until the additional spending (health care) subsides.
It’s often said that the one constant in life is change. To handle the many changes, we made sure that Jim and Kay’s base (fixed) spending was comfortably covered. Looking ahead, Jim and Kay will need to adjust their plan from year to year to accommodate the changes in their lives and market conditions. In retirement, life will be dynamic and Jim and Kay will have a plan in place that will allow them to prosper during good times, buffer their assets during tough times, and adjust to support them through unexpected “speed bumps” along the way.