Traditional investment, financial planning can be disastrous
to your wealth.
We have heard and seen many stories over our 18
years as wealth managers: widows and widowers forced to reduce
their retirement income by 30 percent to 50 percent to make their
wealth last their lifetimes; retired couples having to sell their
homes when their financial plan went awry; entrepreneurs and senior
executives who postponed spending time with their families hoping
to retire early only to realize late in the game that they had
several more years of work ahead of them. We can blame the financial
failures on "the market," economists, market prognosticators,
bad luck. But these are nothing more than scapegoats.
• Don't build a plan on flawed assumptions.
• Stress test your financial plan.
• Use diagnostic tools to help forecast potential
What disturbs us about seeing lives shattered is
that usually it didn't have to happen. The potential pain was
identifiable long before "irrational exuberance." And
people could have been prepared.
All of the investors we described relied on financial advisers,
professionals trained to prepare traditional investment plans.
Each identified his or her risk tolerance and optimized asset
Each prepared a financial plan. But, dusted off
several years later, those plans – like many based on erroneous
assumptions – look pretty silly.
Each received quarterly reports of portfolio performance relative
to market indices. Each followed the rules of conventional wisdom,
which proved unwise.
Think about the senior executive nearing retirement. Five years
ago when he was 55, his adviser projected his retirement plan
based on a "conservative" 11 percent return assumption.
Next year, at 61, he was supposed to be able to stop work with
$2.68 million and enjoy an annual income of $148,000.
He skipped a family vacation and took on additional work. After
all, he was anticipating retirement and would soon have plenty
of family time.
Over the past five years, the market's performance was nowhere
near 11 percent. In fact, his portfolio is now worth $2.23 million.
A year from retirement, his family eagerly awaiting their time
together, he got the bad news. His financial adviser updated the
traditional plan: Based on the market declines and his assumptions,
he would go broke at age 82.
His financial adviser gave him two alternatives.
He could retire next year and live on $125,000 a year –
$23,000 less than originally planned. Or he could work two more
years and spend his principal in later years.
Our executive's plan had a high chance of failure
from the beginning. High probability stress-tested wealth management
plans contemplate the reality that the market goes up and down.
They plan for the impact of short-term market movements on long-term
A trained wealth manager would have shown you that
in all likelihood the changes the traditional plan did not expect
were not only possible but highly probable. Isn't that what a
long-term plan should contemplate?
The difference between a stress-tested high probability
wealth management plan and a traditional financial plan or money
management is that high probability plans contemplate the possible
impact on your wealth of many contributing risk factors.
If you truly value your financial health, you might
reconsider whether leaving your financial future to traditional
financial or investment plans is very wise.
Do you think our senior executive would have made
the promises and emotional commitment to himself and his family
if he had known he had a 4 in 10 chance of running out of money
in retirement? Or if he had known that he had a 59 percent chance
of reaching his $2.68 million goal by age 61?
We know that the pain, the fear and the reality
of market ups and downs can be anticipated and planned for. Current
diagnostic tools can help identify these financial disasters in
advance. Your best course of action requires skill, knowledge
and wisdom. This is what wealth management and stress tested high
probability plans are all about.
Christopher G. Snyder and Haitham "Hutch"
E. Ashoo are principals of Pillar Financial Services in Walnut
Creek. Contact them at 925-356-6780.
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