Detailed planning is essential for the successful navigation of your later years, when paid work may cease completely or partially. And it can be tremendously helpful for your peace of mind as you move toward that season of life.
For a one-time fee of $50, SMI Premium-level members have access to such planning via MoneyGuidePro®, a sophisticated software package normally available only to clients of financial planners who pay more than $1,000 for an MGP license. A strength of MoneyGuidePro® is its ability to model many what-if scenarios.
Developing a viable plan
Our February 2017 walkthrough of MoneyGuidePro® provided much more detail, but here’s a quick recap of the process. After completing the About You section of the software — inputting your age, income, investments, goals (categorized as needs, wants, or wishes), and more — you can see your “Current Scenario” in the Results section. A Monte Carlo analysis of 1,000 scenarios generates your “Probability of Success” — essentially showing you how likely you are to reach your goals.
From there, any needed refinements can be explored with the “Recommended Scenario.” When you click on “Choices,” the software will offer options for improving your plan’s likelihood of success, suggesting clear changes within each of your goal categories. For example, MoneyGuidePro® might suggest reducing your hoped-for retirement travel budget by a specific amount. (The recommendations are clear, though not always easy to accept!) From there, you could go back to the About You section and change your goals accordingly.
Stress testing your plan
Once you have a workable plan in place, MoneyGuidePro® enables you to test your plan against a series of threats. Using the software’s appropriately named What Are You Afraid Of? tool, you can explore the impact of eight different risks. (If you see a blue triangle with an exclamation point next to any of the risks, that means it relates to a specific concern you noted in the About You section.)
You’ll see how each risk could impact your ability to achieve three sets of your goals: All of your goals (those you categorized as needs, wants, and wishes), just those goals labeled needs and wants, and only the goals you identified as needs.
You also can weigh the impact of combining multiple risks (perhaps the husband dies early and the wife needs long-term care at a certain point) by “locking” one risk and then adding another. Here are the risks MoneyGuidePro® enables you to evaluate, along with suggestions for managing them. (Another risk, “Great Recession Loss,” was addressed in a previous article. “Concentrated position” and “Cuts to pension” will show up only if your plan contains these risks.)
This is when more than 10% of your portfolio consists of one security. You can see how various levels of decline in the value of that one holding could impact your plan’s chances of success, which may prompt you to reduce your exposure to that security.
Throughout the data-entry process, MoneyGuidePro® uses a 2.25% default inflation rate, but here’s where you can put your plan up against more extreme rates. You can’t go all 1979 on your scenarios (when inflation topped 13%!), but you can explore options up to 5.25%.
One of the best defenses against inflation is to invest in asset classes that have a good chance of outpacing inflation. For most investors, that means maintaining some exposure to stocks throughout your retirement. For very conservative investors who’ve dialed their equity exposure way back, these inflation scenarios may prompt a shift toward a somewhat higher equity allocation.
Social Security Cuts
Countless articles have been written about the Social Security system’s deteriorating financial condition. What will Congress do to shore up the system? No one can say for sure, so this threat is particularly difficult to gauge. Still, MoneyGuidePro® will help you see how various levels of reduction in SS benefits would impact your financial plan.
What to do about this risk depends on how concerned you are about the prospect of benefits cuts. If you’re very concerned and see that even a 5- or 10-percent reduction would seriously threaten your plan, you may want to increase how much you’re contributing to your retirement accounts.
This risk may prompt you to double check your portfolio’s asset allocation, which impacts estimated returns. If it’s unrealistic for you to invest any more aggressively, the best solution may be to increase your plan’s margin of safety by investing more each month.
Die Early / Live Long
For married couples, this may be the most complex (and unpleasant) risk to examine, but it’s necessary because it could have a significant impact on the likelihood of your plan’s success.
You’ve probably heard more warnings about the risk of living a long life (longevity risk) than a short one, but both are risks. Consider a situation where the husband has been the higher earner and is planning to wait until age 70 to start taking Social Security benefits, primarily because he assumes his wife will outlive him and will then be able to receive his monthly benefit amount instead of hers. But what if he dies before age 70? MoneyGuidePro® can help you model that. (At the very least, make sure your estate planning documents are in order.)
We’ve cautioned before about the potential costs of long-term care, as well as the possibly inflated risks of someday needing nursing home care. The wisdom of purchasing a long-term-care insurance policy depends largely on whether your family has a history of dementia, how high your net worth is, and your comfort level with tapping some of your net worth should an expensive long-term care need arise. At a minimum, consider how well your current home would allow you to “age in place” and whether you should move closer to your adult children.
Cuts to Pension
This risk only applies to those who will receive a defined-benefit pension (which would be entered in the About You section of the software).
One of the built-in solutions to all of these risks has to do with the earlier categorization of your goals as needs, wants, or wishes. When you run various scenarios in the What Are You Afraid Of? section, you’ll see that the confidence level of achieving all of your goals (needs, wants, and wishes) will fall before the confidence level of achieving just your needs and wants. And the confidence level of achieving your needs and wants will fall before the confidence level of achieving just those goals you identified as needs. In other words, even if a worst-case scenario materializes, you still may be able to achieve your most essential goals.
Another solution may be found in your planned retirement spending. You probably have some latitude over the discretionary categories of your retirement budget, such as how much you plan to spend on clothing, entertainment, or travel.
Clearly, retirement planning isn’t a perfect science. However, those who go through the process, taking into consideration various worst-case scenarios, will be better prepared for the future than those who don’t.
As Scripture says, “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.” – Proverbs 22:3