Jeff Bogue, CFP, who was quoted in the December, 2012 edition of the Wall Street Journal, spoke to a few dentists in New Hampshire about “Retirement Planning Challenges”. Here are some highlights:
Rules (There are none.)
Many people like to have “Rules” and simple answers to complex questions in the manner of people like Suze Orman. Usually such “advice” is only a starting point and must be tailored to individual circumstances.
Track spending. When a person knows what current spending is, it is easier to project how that will change in retirement.
Understand the impact of housing.
A house should not be considered a “slam dunk” investment, and downsizing doesn’t always provide the benefits one expects. As we all know, housing values can quickly plummet and houses are not liquid at all.
Renting can be preferable to owning because of: 1) increased flexibility in ability to move, 2) Reduction in maintenance costs, (older houses have higher maintenance costs), 3) Houses shouldn’t be counted on as part of a financial plan for accumulating retirement funds which should be spinning off cash.
Reverse mortgages are the only way houses can provide funds, but this reduces estate values (if that is important to you).
As long as one is alive, there is ALWAYS a housing cost, even if living with the kids. If the parent isn’t paying it, the children are.
Should be considered “longevity insurance”. Social security will pay as long as the recipient lives. There are specific strategies for claiming benefits that depend on ages of spouses as well as contributions.
Long Term Care insurance (LTCI)
If a person can find it, LTCI can be a helpful part of planning, even if a person purchases only partial coverage of the cost of nursing care.
This should be no surprise. The government has a special knack for adjusting numbers and statistics to make things seem better than they actually are. They have changed the way the CPI is measured. Here is a link to check out; http://www.shadowstats.com/alternate_data/inflation-charts as it relates to inflation. Inflation is about 2 percentage points higher than what the government’s pre-1980 rates would show. So, it is important to build in an inflation factor in projections about how much money a person will need in retirement.
It is important to develop a long-term vision. Contrary to this, people often place a higher value on whatever is in the present and short-term thus short-changing the future. Many people succumb to immediate gratification, and thus jeopardize their later years. This is particularly true with how average people invest, selling when a downturn creates fear of falling prices, and buying the euphoria of peaking values. The result, then, is buying high and selling low. As Jeff said, “We do more damage to our portfolios than the markets do”.
We shouldn’t trust our instincts because these “instincts” are emotions often stemming from childhood beliefs and “scripts” that have gotten into our brain from folklore, popular opinion, or family traditions with little basis on fact. Portfolios should be managed objectively using numbers, not emotions. In addition what had been true in the past may no longer be valid in the future, and we need to be able to adapt, and change as the underlying numbers change.
With annual review a portfolio can be tweaked and adjusted to keep it in balance as markets and circumstances change. Asset allocation is one way to do reduce risk.
Jeff can be reached at firstname.lastname@example.org , phone: 207-646-2478, or by mail: Bogue Asset Management LLC, 74 Merriland Ridge Road, Wells, ME 04090
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