Chapter 3: A strategy that works
"I'm happy, don't get me wrong, but I'm also a little confused." Jennifer looks at us, still smiling, but with a slightly puzzled expression.
She continues, "When we came in here asking if we were ready for retirement you asked us some questions, did some maths and told us that we had a 25% probability of having it all work out the way we desired. Then you did some more maths and told us we had a 75% probability..."
Now we're smiling.
"So, what happened? How did you do it?"
"We did it by listening to you tell us what was most important to you; what your highest retirement priority really was. That was for Michael to retire now. We also listened to you tell us what you were flexible with, such as your estate and the amount you spend each year."
Then we lean in to add extra emphasis, "Jennifer, all we did was guide you to make smart decisions and to prioritise what matters to you the most. I'll show you how."
Where we started
Let's recall where we started. Michael and Jennifer laid out their aspirational retirement goals including retiring right away, leaving the children a large estate from the portfolio and living on $120,000 per year.
The following chart shows the process. The first row records that, if Michael and Jennifer do nothing and keep their retirement plans unchanged, there is only a 25% probability that the results will turn out as planned, or better.
In the remaining rows we order Michael and Jennifer's retirement priorities, starting with low priority retirement factors such as estate and portfolio risk at the top, and finishing with their high priority items, such as the year of retirement, at the bottom:
|Lowest priority||Status quo||Do nothing||25%|
|Estate||Adjust to $200K||30%|
|Portfolio risk||Increase to 70/30||39%|
|Lifestyle||Adjust to $100,000 before super, $72,000 after||72%|
|Retirement length||Plan for 33 years||76%|
|Probability||No change necessary||76%|
|Retirement year/savings||No change necessary||76%|
|Highest priority||Current amount invested||No flexibility available||76%|
We turn to Michael and Jennifer, "Clearly, a 25% probability of success was not acceptable; it meant we required markets to do better than expected in order for you to reach your retirement goals. So what we did was start with the retirement factors you told us were the lowest priority for you. Your lowest priority item was the value of your portfolio within your overall estate. You told us you were flexible to reduce it from $400,000 to $200,000 in today's dollars. Doing that increased the probability of success to 30%."
Michael looks up with a smile and says, "So basically you're increasing our probability by worsening our retirement plans?"
We chuckle. "Well, sort of. We want you to have the retirement you desire. But Michael, if something's got to give, we're going to start with the things you feel least strongly about. That way we can protect the more important factors, such as retiring as soon as possible."
As we go through their retirement factors from low priority to high priority, a strategy emerges.
Michael and Jennifer are quick to pick up the implications as we look at the chart. "So basically, retiring now is possible. It just means making trade-offs on all those other factors."
"That's right. We recommend you think about this and consider the recommended trade-offs carefully. You don't need to make a decision today. In fact, you can come back later and ask us to run other scenarios based on some modifications. This is an important decision; this is your strategy. The important message for today is that retirement today is possible, if the recommended trade-offs feel right to you."
Michael leans back, then turns to Jennifer. "This feels good to me, honey. It's so nice to know we have some options."
Jennifer responds, "It does," then turns to us. "Would you mind if we went home and thought about this a little more? I mean, it feels right, but it's a big decision."
"Absolutely, we think that's wise." Jennifer looks a bit relieved. We continue, "It's important for you to know that, in our experience, the goal posts will move. What we mean by that is life's unexpected circumstances, good or not so good, will likely require you to adapt your financial strategy. We understand that, and we want you to know we'll adjust your strategy accordingly. This could be due to something good, like a child's wedding, a long holiday, or something else."
"Our daughter's wedding's already over, thank goodness!" Michael exclaims, "But if grandkids come along I could see a long trip to the UK for a visit."
Adapting to reality
"Exactly," we agree. "We can adapt to that circumstance if it happens, and give you options. Oh, and one more important thing - if markets went really well and we were tracking far ahead of plan, we may take some portfolio risk off the table. It may not be necessary to rely on markets as much to reach our goals, so why take the unnecessary risk? But we'll talk about it with you before we do anything, because you may have other priorities to consider too. Likewise, if markets go badly we're not going to sit on our hands. We'll discuss the implications and give you guidance on what you should do to stay on track. In other words, our strategy will adapt to reality. If it doesn't, it's not really a strategy."
Michael gives us a serious look, "I'm glad you've said that. I mean, how can we plan definitely now for the next 33 years? I have trouble with five year plans at work - our business strategy needs to adapt to new realities each year."
Nodding, we reply, "We know, and we agree. It's important to have a direction but it's also important you know we'll adapt to your changing priorities and plans. It's our job to give you financial options and ensure the options take into account your long term objectives."
Michael looks at us both, "That's really good guys."
Time to think
With that, we give them the plan and the materials so they can consider them privately at home. As they leave our office, they both look much less tense than they did when they walked in. They now know they have real options and understand the implications of their decisions on the future. That's a big relief.
The next day, the phone rings. It's Michael. "We had a long discussion and we want to go ahead. We just had to make sure our lifestyle plans would work and I think we're both happy with that now. When can we come back in? Let's get started." Michael pauses for a moment then says, "Thank you guys, I feel so much more in control now."
"Thank you, Michael," we respond. "Giving you a strategy to put you in control of your financial life is what we feel best about doing."
Note: Michael and Jennifer are a fictitious couple but are based on the experiences of many clients we work with.