Question

At the retirement planning meeting, Richard and Monica (62) were in agreement that they were well short of the money they needed for retirement at Richard’s age (65). Richard said he wanted to manage the investments and thought that savings outside the pension given current lower tax rates for capital gains and dividends made sense.

In working out the capital needs analysis, it became apparent that there was need for an additional $17,000 of savings annually over what was previously calculated. The first reason had to do with a recent job development that resulted in a projected moderation in Richard’s raises in salary to a level 1–2 percentage points below the inflation rate and that made his job more risky. The second was the running of the total portfolio management approach, which indicated that the assumed investment rate needed to be lowered to 5 percent.

Monica thought that their tolerance for risk would have to be cut back. She said she would consider taking a full-time job if necessary. Monica thought they could downsize by selling their house and realizing an extra $100,000. She wondered what level of insurance she could afford and whether they should cut back on the amount. Richard didn’t like that idea.

Case Application Questions:

What are Richard and Monica’s alternatives in covering the shortfall in annual retirement savings?What are your recommendations?

What do you think of Monica’s offer to take a job?

Under the TPM approach, should the risky portion of their asset allocation be raised or lowered?

Should their insurance be raised or lowered?

Do you feel they should downsize their dwelling?

What are your recommendations for savings, investing, life insurance?

What kind of follow-up with the advisor would you recommend?

Construct the retirement planning portion of the financial plan using your answers to the above questions.

Answer 1

What are Richard and Monica’s alternatives in covering the shortfall in annual retirement savings?What are your recommendations?

We have been given information that Richard is 65 years old and Monica is 62 years old. We also have been given information

that their annual retirement savings falls short of $17000 per annum, which is actually a lot of money for two seniors who are

into retirement

So we need to actually find out why is their expenses is so high that it is $17 000 over board. Can any of this expenses get

trimmed. So break expenses into need based and not need based or remove all needs based on luxury, prestige or showful needs.

Some steps they can take are -

Eliminate All Consumer Debt: Credit card debt is wasteful and expensive. They must pay off their highest interest balances first and use the money freed up to accelerate the payoff of the remaining cards They must learn to never spend more in a month than what they can afford so that they don’t accumulate new debt. They must learn to never settle for making minimum payments on credit cards because it’s financial suicide on the installment plan as they can not afford the compound interest. the sooner they learn to stop overspending and pay down existing debt, the sooner their money can be redirected to savings and earn some financial returns to close the gap.

Increase Savings Automatically: Cutting unwanted and wasteful expenditure will help savings going up automatically leading to the gap getting lower.

Eliminate All Unnecessary Expenses: A few dollars here and a few dollars there can add up to enormous sums today and compound into a fortune during retirement. Thy need to understand this value. The truth is much of our spending is habit, and this habits should be challenged and diverted to more satisfying and a lot more enriching habits.

Eliminate Unnecessary Insurance Policies: They can think of reducing their insurance policies - the rule for insurance is only protect against losses you can’t afford to take. The insurance they needed 10 or 20 years ago to protect their family may be an unnecessary expense now. They may be able to eliminate or reduce coverage and save the premiums for retirement instead.

Drive Used Instead of New: Cars are a big expense. Few people appreciate how certain quality cars can travel 200,000 or 300,000 miles reliably. Let someone else pay the depreciation to impress their friends with new so you can drive used for pennies on the dollar after it’s little more than broken in. This strategy can add five figures to one's retirement plan every time you apply it and Richard and Monica must take benefit of this.

Moonlighting Income: They can think of second careers and home-based businesses. The most obvious is they can provide additional income for retirement savings. Less obvious is how they can safely transition one into a second career that one might really enjoy continuing after retirement. The keys to making this strategy work are to pursue the moonlighting income in a field they are passionate about and would enjoy even during retirement, and to commit all revenue produced toward boosting savings rather than lifestyle.

What do you think of Monica’s offer to take a job?

It is worth a try if she is healthy to work and travel and would get a decent pay for her employment

Under the TPM approach, should the risky portion of their asset allocation be raised or lowered?

Under Total Portfolio Management, all risky portions of Richard and Monica's assets should be immediately lowered down

New forecast has to be made with low to nil risks taking lower expenses and lower revenues into account

Should their insurance be raised or lowered?

Their insurance should be lowered. They may not need high value family insurances that they perhaps needed some 20 years

ago. They must eliminate all wasteful insurances.

Do you feel they should downsize their dwelling?

It is a worse case option that they may need to re-consider and the option can not be ruled out. But if they are able to scale down

their expenses and avoid over spending and increase their savings in the bank account, maybe this option might not be

necessary. They can think of sub-letting a portion of their house on rent to begin with before going the worse off route of all

together selling their house and downsize their home to a new neighbourhood which may not be so easy at this ripe old age

What are your recommendations for savings, investing, life insurance?

Already answered above. Reduce unwanted expenses and increase savings, invest the savings in yearly fixed depsoits to earn

a little bit on the amount saved. Cut all insurance policies that can be eliminated, as the premiums will become higher as they

age

What kind of follow-up with the advisor would you recommend?

Follow up with the advisor would only be for -

Convert non-producing assets into investment savings

So re-look at the performances of all the investments and re-structure them to optimise savings uniformly in all assets and eliminate non-performing assets all together.

Construct the retirement planning portion of the financial plan using your answers to the above questions.

Exmaple below with some hypothetical numbers

Total Gap                                                                                                                               $17000 annually

Less:

Eliminate wasteful expenditure at $ 500 per month    $6000 p.a

Downsize insurance    $3000 p.a.

Rent a portion of house    $ 6000 p.a.

Choose a second career    $ 2000 p.a.

Gap    Nil