I wrote in my recent article that I have just completed a 10 day road trip visiting clients.
One of the couples I called on, Alistair and Barbara, who have been clients for 10 years +, are facing retirement at the end of the year. This is something we have been planning for, frequently modelling their situation using information and ideas they have in regards to retirement. The things that would have material effect on our modelling include the impact of buying a new vehicle, securing their privacy by buying a neighbouring block of land, travel including regular cruises and some domestic and overseas travel, renovations to their home. All these things are important to them.
And there are many more items that need to be factored in as well, such as their risk tolerance – how much downside risk can they handle. We have been working with these clients for many years so we know that Barbara has a lower risk tolerance than Alistair, and because of this we are often faced with Alistair wanting to be more aggressive, although only marginally so, than Barbara, and the end result is often come to via discussion and review of the downside risks.
It’s an in depth discussion, but in the end, it is a discussion that has to take place and the clients must be comfortable with the risks being taken with their money. Of course, risk profiling Is important, but achieving the long term goals our clients have can result in a trade-off between their desired risk profile and achieving those goals. No-one wants to take on risk that is not required and sometimes additional risk, although not desired, offers the only solution long term to the achievement of client goals. Either we take on a little more risk, or we scale down the aspirations, reduce what we are trying to achieve.
These guys have a small amount of debt which is covered by a portfolio of shares they purchased some years ago. They are reluctant to keep the debt, the only debt they have, post retirement and the decision will probably be made to sell the shares to clear the debt. What cash is left, after retaining a buffer in bank accounts, will probably end up in superannuation.
The essence of retirement planning in my view is the sleep test. We want our clients to live a stress free life. We want them to be well rested and comfortable with the recommendations we make around their strategy and products. We and the clients prefer not to have too many surprises, so modelling downside risk is important for us. It gives us an idea how bullet proof our clients models are. Not all are bullet proof – there’s simply not enough cash to be bullet proof, but at least when the modelling is done, our clients are aware of the risks and can live accordingly.
These particular clients will be pretty secure – with 10 years to get it right, they are looking at a pretty secure retirement. They have taken strong action to prepare for this day.
There are many things that can derail financial plans. Investment markets can have an impact, but many of you would be surprised to know that investor behaviour is the one thing that does most damage. Trying to time markets, pulling out at the wrong time, spending more than was originally budgeted without considering the consequences, gifting money to kids that really is not affordable and the list goes on. Most of the risk is behavioural.
Peter Jordan is a Sub Authorised Representative 244948 of Joredg Pty Ltd as trustee for the Jordan Hybrid Fixed Trust, Corporate Authorised Representative 473095 of Keystone Partnership Pty Ltd AFSL No 466137