Nearing Retirement? Financial Advice Is Crucial

Planning for retirement and charting your course through retirement can be very complex. A financial advisor can help you through the planning process, so that your golden years are truly golden.

  • May 2018

Executive Summary

Retirement planning has become an uncertain exercise in recent years. As a result, many investors now engage the services of a financial advisor when making critical retirement planning decisions. Those nearing retirement need to begin addressing some important questions well in advance of their actual retirement date.

  • How much will retirement cost?
  • How will I pay for it?
  • How much can I spend each year and not run out of money?

An advisor can help guide the decision process and provide “dollars-and-cents” calculations using sophisticated computer forecasting models. When used in investment applications, tools such as the Monte Carlo simulation are gaining popularity as a retirement planning resource. This article describes how such tools work and sets parameters for their proper application in the overall retirement planning process.

Timing Is Essential In Retirement Planning

Retirement planning has become more challenging in recent years. Stock markets remain volatile and unpredictable, yet “safe” investments such as money market accounts and CDs have continued to offer relatively low short-term interest rates.

Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes. Investors planning for retirement have questions about how these factors will affect their retirement funding issues. Have I saved enough? What is a reasonable and sustainable withdrawal amount? Can I plan for retirement while also meeting other intermediate financial goals, such as educating children and paying off debt? These and other questions weigh heavily on the minds of most retirement investors.

A Financial Advisor May Be Part Of The Solution

While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still pursue retirement security. But to do so, you may want to consider engaging the services of a financial planning expert.

Once retained only by the wealthy, financial advisors now assist all types of investors in making decisions about retirement. In fact, perhaps one of the most common reasons for people to begin financial planning is to build a retirement fund.

Have You Begun Your Countdown To Retirement?

Have you begun your countdown to retirement? If so, a financial advisor can help you make an efficient transition to the next stage of your financial life. Here are some critical topics to address with your advisor a few years before you expect to retire.

Determine what retirement will cost.

Many people enter retirement without the slightest clue as to what they want to do with their time–or whether they have enough money to do it. Will you continue to work part time? Travel? Maintain a second residence? Make improvements to your existing home? Be sure you plan how you’ll spend your time–because that decision will have a direct impact on how much retirement will cost you. 

Assess your sources of retirement income.

Estimate the income and savings you can rely on during retirement. How much will you receive from Social Security, a company pension, 401(k) plan, or other employee-sponsored retirement accounts? Confirm amounts in any other retirement assets, such as IRAs and personal investments. If your anticipated income does not equal or exceed your projected expenses, develop a plan to bring these two into alignment. 

Arrive at a spending limit.

Once you have a handle on expected income and expenses, calculate how much you can withdraw from your accounts each year without spending down your principal. Your advisor can create various withdrawal scenarios based on forecasted investment returns, inflation expectations, and other practical financial planning considerations.

In the past, calculating annual withdrawal amounts was done by means of simple spreadsheet analysis. A planner would use historical performance averages to project future portfolio values and automatic calculations for variables such as inflation and life expectancy. The problem with such an approach is that the lack of flexibility in the calculations makes it difficult to account for year-by-year variations in outcomes or changes in an individual's life or lifestyle that can affect underlying assumptions.

Fast forward to the present where sophisticated computer forecasting models such as the Monte Carlo simulation have become the preferred tools for dealing with the uncertainty surrounding retirement planning. When used in investment decision making, the Monte Carlo simulation forecasts how a portfolio is likely to perform under thousands of possible scenarios based on a combination of parameters–such as life expectancy, interest rates, equity returns, and inflation–and modeled around a specific problem (e.g., How much can I accumulate for retirement?). Results are recorded and ordered according to which scenario is most likely to match the investor's retirement goals.

Tools such as the Monte Carlo simulation can help provide confidence to investors by addressing some of the toughest retirement planning challenges

With more attention being paid to retirement planning, forecasting tools based on the Monte Carlo simulation have enjoyed a renewed popularity in investment analysis. But remember, any forecasting tool, no matter how sophisticated, cannot predict the future. What’s more, forecasts are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future performance. For this reason, you should think of forecasts as a starting point for discussion with your advisor–not as your ultimate planning solution.

Planning for retirement and charting your course through retirement can be very complex. A financial advisor can help you through the planning process, so that your golden years are truly golden

The tax information contained herein is provided for informational purposes only. AMG Funds does not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific financial or tax situation.
AMG Distributors, Inc., a member of FINRA/SIPC.
AMG Funds LLC is a subsidiary and U.S. Distribution arm of Affiliated Managers Group, Inc. (NYSE: AMG).

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