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Retirement Dates: Expectations and Reality

robertredford-spygame-phone-tsrSpy Game (2001) is all about retirement: Nathan Muir’s last day at work at the CIA. Muir (Robert Redford) has a protege, Bishop (Brad Pitt), who’s been thrown into a very unpleasant prison in coastal China.

Muir calls his broker and tells him to sell all of his assets, raising $282,000 to bribe a Chinese official to cut off the electricity to the prison for 30 minutes, during which time Muir calls in a team of Navy SEALS to liberate Bishop.

Flashbacks take us to East Berlin and Beirut, but most of the film is set at Langley, following Muir through a last day at work before retirement. It’s not easy to clean out your office while planning a covert operation a hemisphere away.

Even if you don’t work at the CIA, retirement can happen unexpectedly, and it’s important for clients and advisors to bear that in mind for financial and estate planning.

I wanted to obtain more data on when clients expect to retire, compared to when they actually do retire.

Excellent, recent data on this question is available in the 2014 Retirement Confidence Survey (RCS) of 1,000 workers and 500 retirees undertaken and analyzed by the Employee Benefit Research Institute.

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The Right Stuff (1983) is a movie that’s begun to be fully appreciated only recently.

One of its best scenes is when the iconic test pilot Chuck Yeager (played by Sam Shepard) takes a very dangerous flight in an NF-104 Starfighter in December 1963, attempting to break the world altitude record.

At the edge of space above the high desert, Yeager goes “up, up the long delirious burning blue.” At the top of his parabola, the tanks run dry, the engines flame out, and the aircraft goes into a flat spin. The look on Yeager’s face as he slows to a stop at the peak of the arc is telling: he knows he’s going to have a problem really soon.

Even if you aren’t a test pilot, you, too, are very likely to hit the top of your income growth trajectory well before your career makes a landing and you leave the work force.

Understanding when your income will peak is really important to making effective choices about consumption, savings, and lifestyle — choices that will carry through to your estate planning, too.

Likewise, advisors will do better work for clients if they understand where a client’s income statement is positioned in that client’s career.

What does the best available data suggest for your income trajectory? If you have a college degree, the news is quite good in your 20s, good in your 30s, and mediocre by your mid 40s.

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A Sherlock Holmes Approach to Your Income Statement

 homesandwatsonI think “budgets” are the reason many more people don’t have a sensible strategy for reaching their financial goals. The word “budget” creates obstacles in two ways.

First, budgets imply choices, tradeoffs, and the unpleasant word “no.”

Second, most people lack even half the clarity about their spending that’s required to make a reasonably accurate budget. Without good data, the budget-building process bogs down and even when it moves ahead in fits and starts, results aren’t very useful.

In a perfect world, clients and their advisors would be able to immediately, effortlessly conjure up crisp, accurate, detailed data on inflows and outflows of cash, broken down into relevant categories.

We do not live in a perfect world.

But the cash flows question needs to be addressed, and done so in a way that isn’t a barrier to clients moving forward with planning.

First, let’s banish the “budget” word. This is not an exercise in encouraging spending reductions. But it should be an exercise in figuring out what your savings rate is, and what it could be, because your savings rate is one of the most powerful variables causing change in your Total Balance Sheet over time. To learn more about your actual and potential savings rate, you should consider your Total Income Statement.

Life Cycle Estate and Financial Planning Total Income StatementThe Total Income Statement looks complicated, but it’s designed to be simple to use when applied with Holmesian deduction. As Sherlock said himself in The Sign of the Four:

When you have eliminated the impossible, whatever remains, however improbable, must be the truth.

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A financial plan should be a thoughtful alignment of your income, expenses, saving, and asset allocation that makes it more likely you’ll achieve what matters most to you. Your estate plan is financial plan’s autopilot, ensuring that your capabilities carry out your goals, even if you’re not around to supervise things yourself.

Using the Quadrant-based life cycle planning model, your balance sheet is one of your key Facts, because it presents your capabilities and your obligations on a single page.

A conventional balance sheet (one that shows your “visible” assets, liabilities, and net worth) shows the capabilities and obligations you have presently.

In theory.

In reality, your conventional balance sheet is likely leaving out some (or even most of) the really important stuff.

Good stuff such as your stream of future earnings or your plans to put your child through medical school. Bad stuff, like your spouse’s compulsive shopping. Or stuff that might be good, or bad, depending on your perspective, like your hobby of collecting boatscars, or watches.

To show all of your capabilities and obligations, you need to include these “invisible” assets and liabilities, to produce a Total Balance Sheet.

A thoughtful consideration of your Total Balance Sheet should be one of key engines for your integrated financial and estate plan.

Life Cycle Estate and Financial Planning Total Balance Sheet

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Demography, Destiny, and Your Family’s Estate Plan

August ComteIt’s unclear whether Auguste Comte really said that “demography is destiny,” but you can and should use demographic data to make better estate and financial planning decisions.

As we’ve noted, an estate plan often represents a set of predictions about a family’s future, predictions that will be improved when the plan considers the family’s Longevity Distribution. Your family has one, it’s unique, and your planning should reflect it.

Demographers and actuaries at the Social Security Administration collect and summarize data on lifespan probabilities. The SSA data assumes a cohort of 100,000 people, and tracks how the cohort will grow smaller over time. By the time male cohort members are about age 80, half of them are projected to be living. For the female cohort, the halfway mark is around age 84. Those male and female halfway marks are the government’s best life expectancy estimates.

I think the distribution of lifespan reflected in the cohorts is much more useful for planning by clients and advisors than a single life expectancy point estimate.

If a financial and estate plan relies on point life expectancy estimates, those estimates are almost certain to be wrong, because half of the cohort members will live less, and half will live longer, than their life expectancy. A robust plan should work well across a wide range of longevity spans for various family members.

I used the SSA cohort data to make sample Longevity Distributions for two different families.

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