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Retirement Planning: Do the Wealthy Have Better Insight? March 10, 2009

Posted by retirementwithaplan in retirement.
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There was a behavioral study done in Malcolm Galdwell’s book “Blink” that examines the sudden realization of the obvious. The experiment goes something like this: people are given two swinging ropes that are not connected and told to join them. Few are able to figure out how to do this until the researcher inadvertently swings one of the ropes. This gives those befuddled participants the notion that if they swing both ropes, they might find them meeting in the middle and solving what would seem like a simple problem. In many instances, they report this as sudden inspiration.

031009we2009althFor many of us, retirement planning offers the same conundrum. The obvious answer eludes us and yet we sit and ponder the same problem: will I reach my retirement goal? Not to worry, the wealthy, those with assets that are well beyond the national average (over $500,000 compared to a dismal $30,000 that the rest of us have) are suffering the same dilemma. What if anything can we learn from those who seem to be far better situated for their retirement than the vast majority of us?

PNC Wealth Management concluded as the result of its fifth annual Wealth and Values Survey and the researchers were surprised that one-third of those surveyed – 1263 affluent savers participated – are either behind, consider their future as uncertain or have no set or realistic retirement goal.

“The last 18 months have made everyone re-evaluate their goals, no matter how much money they make” Paul Gaudio, a senior wealth planner with PNC Wealth Management in Princeton, N.J suggests saying that, “in my experience nobody, particularly those earning more than $150,000 per year, like to admit defeat or mistakes, and so they create financial illusions to rationalize their retirement plans.”

The affluent offer somewhat different outlooks on what retirement will be. Slightly more than half envision a time of leisure and travel while the vast majority see their post-work years as an opportunity to reconnect with their families and friends.

What do they advise each other?
First and foremost is health. Arriving at retirement age in a healthy state can often be easier to say than do. The stress of attaining and keeping wealth is often more than a full time job.

They often suggest that developing a relationship with your family while you are still working, looking for activities that include your spouse or partner and possibly even developing a new career while still working can be beneficial to not only your well-being, but your financial stability as well.

Each of these suggestions warrants considering. I have long espoused the need to make retirement goals based not on how much money you can accumulate but how to keep the money you have from disappearing faster than you age. A carefully considered plan looks to a withdrawal rate (4% should be enough to keep you from drawing down your assets before you die) and a replenishment rate (this is easily accomplished with the development of a second career while you are still employed).

The wealthy are thin-slicing their future. While many of us are overlooking the obvious, Instead of setting goals and playing with calculators, we should be focused on saving more and spending less, developing new talents instead of trying to wring out the last drops of our current jobs, and reassessing how healthy we will be in retirement.

In many instances we try and plan for inflation (almost always using a number that is too low), taxes (no ones knows what these will be even five years down the road), and insurances (health, property and liability coverage is expected to increase in the future but by how much is almost impossible to gauge, making good health in retirement a cost effective way of offsetting these costs).

Those calculators won’t help.
For many of us, the use of online calculators are simply not up to the task of determining all of these factors. They offer more than simple calculations by including what is referred to as a Monte Carlo situation, a complex series of number-crunching that in effect, takes all of the possible scenarios for the markets, up or down, and crunches them to provide some sort of outlook for what you are squirreling away.

Does this make a case for financial planners? Hardly. No calculator offers more than hard and fast facts, void of the nuances that retirement planning can encounter. Few advisers (who use the same sort of calculations or sometimes, fancy financial software), even after lengthy consultations can adjust the information you might give them to provide an optimistic outlook. And they want you to leave their office feeling good about yourself and their (your) plan for the future.

This is were the wealthy come in. They are focused on what the future may look like without taking their eye off of the realities of how to get there. The value of long range predictions is not as good as you might imagine. Short-term predictions can help with your plan more than you realize.

If you can work on your health, spend more time with your family, develop some out-of-your-current-career interests, and spend quite a bit less, you will find the natural flow of money will go towards your future and not toward paying fees for advice that is just as good as a guess.

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