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Long-Term Planning for a Long-Term Life

The Social Diary Wealth Management Columnist Martin S. "Duke" Johnson
Duke Johnson JD MBT CLU, - Column#1, February 3rd, 2006

Got an Exit Plan?

Sixty million Americans will reach retirement age over the next twenty years and will face economic, tax, and investment issues that will challenge traditional assumptions about retirement. More than ever before, we must redefine "living within our means" in order to save more. We must balance our financial priorities for today with tomorrow's expected retirement lifestyle. Over your "paycheck years," use Duke's basic "Cocktail Napkin" rules:

"Rule of 72" -- at 7%, your money will double in 10 years, at higher rates it grows more quickly and vice versa;
"60/40" -- 60% stock, 40% fixed income suitable for those 65 and under;

"50/50"-- 50% stock, 50% fixed income, perfect for investors over 65.

Reality Check

Here are four important financial realities which must be addressed now even if your retirement is in the distant future. This is not to suggest, as the TV ad does, that a simple tweak to your portfolio will get you the villa!

Reality One: An average 65 year old may expect to live another 20 years; accordingly, our portfolio planning now projects income all the way to age 90. In addition, we look at deferred and immediate annuities to help clients guarantee income for their lifetimes. We use these income securities to complement a balanced portfolio of stocks and bonds, and then generate "cash flow" on a total return basis. Reality dictates that total portfolio return, not just the income stream, is necessary to meet 20-30 years of distributions.

Reality Two: Forget the pension plan income for life. Even corporate America has forsaken this basic retirement income tool. Litigation continues today as an attempt to prevent large companies from changing Deferred Benefit Pensions to Profit Sharing and 401(k) type plans for employees. The reality is that you must use both pre-tax and after-tax savings plans to provide for your retirement. Maximize contributions to your plans at work; use pre-tax plans for medical and dental expenses, and if you have dual incomes, employ the "80/20" rule and save 20% of earnings in a Vanguard CA Tax-Free Fund or a balanced fund similar to the Dodge & Cox Balanced Fund (now closed to new investors).

Reality Three: Imagine -- retirement will cost more! This is the second Great American Myth; in fact, our experience shows that in the first "transition" year, spending increases by nearly 20%! And don't forget taxes-- you'll likely be in the same tax bracket as you were in your working days, unless you've loaded up on tax-frees over the years.

Reality Four: Personal saving is a must! Too often, people buy real estate and treat it like a bank account. With current low mortgage rates it is easy to forget about saving and assume that appreciation can substitute for putting money away. Our real estate cycle will change -- I've seen it go up and down over the past four decades in San Diego. There is already evidence to support a slowing real estate market! Building a prudent "exit plan" requires: systematic savings plans (20% of gross income) and a minimum of 50% in low-cost, tax efficient equities balanced with REITS and foreign and municipal bonds.

For a comfortable retirement, you'll need twenty times your annual income objective! If you need $100,000 to retire this year, you'd better have $2 million in pension and investments saved away. If not, according to WSJ Financial columnist Jonathan Clements: "cut taxes, fire your broker, and get a part time job!"

* Martin S. "Duke" Johnson is the President & Chief Investment Officer of La Jolla Institute for Wealth Management. Johnson's credentials include: JD, University of Connecticut School of Law; MBA (Tax) Golden Gate University, San Francisco; BA, Baldwin-Wallace College, Berea, Ohio; CLU, American College, Bryn Mawr, Pennsylvania; American, Connecticut & Colorado Bar Associations

Mr. Johnson has over 30 years of diversified experience in the fields of investment counseling, taxation, insurance, estate planning, and law. Previously, Mr. Johnson was Vice President of E.F. Hutton's Personal Financial Management division and served in various investment and management positions for Aetna Life & Casualty and INA Corporation.

duke@lajollawealth.com

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