By FPA member Jason K. Branning, CFP®, and M. Ray Grubbs, Ph.D.
Last Updated: April 19, 2010
The Boy Scouts offer a merit badge called orienteering. Orienteering explains how to read a compass so that you will know where you are and where you are going. Let's try some retirement orienteering. We will need a map and a compass. Of course, everyone's situation is different, but these are rules of thumb that may give you a frame of reference for where you are as you think about your retirement. For this article, let's define our map as a retirement plan, and a compass as an adviser.
If you are going on a backpacking trip, you will want to take a map, so you will not get lost in the mountains. Entering retirement without a retirement plan is like going backpacking without a map. Why would a retiree enter retirement without a retirement map? A map's legend will tell us the type of terrain ahead on the trail if we match the legend's symbols with the map's images. We know that where we see a blue squiggly line on the map, we can expect a stream, etc. A good retirement plan will help show you how to maintain your at-retirement lifestyle throughout your life by preparing you for events you may face during retirement.
Beyond a map, you'll be well served to have a compass. The job of a compass is to act as an independent third party that gives you a reference point, by always pointing north. If we equate the compass to an adviser, then a qualified adviser is there to always point toward your goals and help you stay on the right course to arrive where you want to go.
A recent report from the Society of Actuaries details that millions of Americans who are nearing retirement find themselves unable or unwilling to use a retirement map and compass. "Individuals are clearly concerned about their retirement and the associated risks, but many are still not taking the necessary actions and planning to address these issues.1" Why are so few retirees making the necessary changes as they plan for retirement, even though they recognize significant gaps?
The study does not indicate why retirees are not acting on what they claim to know. Perhaps retirees do not have a retirement map or a compass. Or, perhaps they have a map, but cannot interpret the symbols on the map's legend. Or maybe retirees do not have a third party point of reference and should consult an adviser. If any of these are lacking, it can be a real struggle to determine a comprehensive approach to solving your retirement concerns.
Retirees are encouraged to re-examine the retirement question by starting with the map itself. In hiking, like life, the trail may be risky or rugged at times and you may have to take some detours. Retirees must also be prepared to meet the challenges of outliving their assets, or facing a health or long-term care crisis. With the help of a map and a compass, retirees can be as prepared as is possible to meet these.
In order to help you meet your retirement goals, Modern Retirement Theory2 encourages you to consider framing a retirement plan around two fundamental issues — longevity or how long you will live and then around the conditions within longevity or those things that may happen to you during life.
Modern Retirement Theory (MRT)
Premise 1: An Absolute Goal
Retirement is an absolute goal, not a relative one. In many ways, retirement has become a modern rite of passage into the golden years — a time to reflect, enjoy and engage life in new ways. Recovering from negative market cycles or health issues may force lifestyle changes on many retirees. MRT is built on the premise that regardless of what occurs in life to an individual retiree, an at-retirement monetary lifestyle will be maintained. Additionally, the absolute goal of a secure, stable and sustainable retirement should be initiated by the retiree and his or her family — the timing of which should not be dependent on market permission.
Premise 2: Individualized and Client Centric
Planning and executing retirement funding should focus on individuals rather than historical data or group statistics. MRT examines the risk to the individual during retirement and offers methods to mitigate, transfer or eliminate these individual risks. The circumstance of every retiree is vastly different, but all share the two risks to retirement identified by MRT.
Premise 3: Outlook Ambiguity — The Future Is Unknowable to the Individual
MRT acknowledges that future events are always unknown to individuals. No one knows in the individual case what market, health or other event may present itself during retirement. MRT attempts to offset individual retiree risk.
Premise 4: Secure, Stable and Sustainable
MRT provides retirement funding that is simultaneously secure, stable and sustainable. Secure retirement funding is guaranteed income. Stable retirement funding is income that is not subject to wide fluctuations unless intentional and initiated by the retiree. Sustainable retirement funding is income that will last for a lifetime or lifetimes and allows for inflationary increases to maintain lifestyles.
Premise 5: Retirement Sheet
Retirement funding should utilize an individual's Social Security benefits, pensions, as well as the entire balance sheet, not just portfolio assets. Focusing on all assets will help advisers and retirees better maintain their lifestyle over their retirement years by using other income-producing assets.
Premise 6: Funding Priority
A hierarchical priority of retirement funding can be established to offset retirement risk. MRT addresses the risks to an individual retirement by establishing a priority of funds, each with specific purposes. Depending on the individual retiree's financial situation, some or all of the funds may be implemented.
With more Americans than ever retiring, concerns for how to retire and stay retired have never been higher. Qualified financial advisers can help retirees assess their preparedness for retirement, as well as provide advice for ways to achieve a sustainable retirement for life.
FPA member Jason Branning is a fee-based investment adviser and financial planner with CS Planning Corp. in Ridgeland, Miss. He owns Branning Wealth Management LLC and serves as a board trustee to FPA of Mississippi.
Ray Grubbs is a professor of management at the Else School of Management at Millsaps College in Jackson, Miss. He consults with numerous private, public and nonprofit organizations.
1 Society of Actuaries report "Risks and Process of Retirement", April 2010.
2 "Modern Retirement Theory", Journal of Financial Planning's Retirement Distribution Supplement, December 2009. Copyright Jason Branning and Ray Grubbs.