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Investor’s Corner

By John Gudritz CFA
Principal
Front Street Investment Management LLC
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I have found over the years that most people put off taking stock of their current financial situation and projecting what their retirement might look like.

Procrastination of this type is a shame because, in the financial world, time is your friend. It is like not wanting to go to a doctor for a preventative test because of what the results will show.

The fact is, in medicine and in the financial world, “the truth shall set you free.” Only when you know your physical and financial conditions are you in a position to deal with them in an informative way.

Going through the process of identifying all of the current and future liabilities and the sources of future retirement income — as well as determining the amount of investment assets that will be available to provide supplemental income for a comfortable life — is cathartic. It truly feels good.

It gives people a sense of security in that they know where they are now financially and where they need to be to provide the retirement life they want — or at least can afford. Even when the projections are disappointing, there is still time to take action to delay retirement or revise the expected retirement lifestyle. Not planning leaves your retirement to chance, which can be a bad bet to make and totally unnecessary.

There seems to be less urgency about assessing people’s financial health versus their physical condition because, after all, it is only money. We have all heard the adages, “If you have your health, you have everything” and “Money can’t buy happiness.”

While I agree you need good health to enjoy the fruits of your labor, I can tell you it is pretty stressful to be nearing retirement with little to show in savings for many years of work.

People are living so much longer than they did even 50 years ago. When I was young (in the 1950s), it was expected that people would live to be somewhere in their 70s. That meant that their retirement would last about 10 years — give or take.

That has changed. Every day, I read the obituary section in the local newspaper, and I see most people going to meet their maker in their 80s. I even see more 90-somethings than I used to.

Now most of us have to plan on our retirement lasting 20 years or more. For many of us, there will be the need for long-term care at some point. In today’s dollars, a comfortable retirement for many people will require at least $500,000 in retirement savings — assuming Social Security will be there when it is needed. This also assumes the mortgage on the house has been paid off along with other debts. If not, the number is much bigger.

The point is: The sooner you have a financial assessment and plan put together, the more time you will have to make adjustments to the execution of the plan to make the eventual reality close to what the expectations are now.

While planning now is important, many people will make a big mistake in the execution of the plan. The fact is that many financial planners are good at the financial assessment and planning process but fall short on their knowledge and expertise of investments.

Analyzing and managing investments take certain skills that are learned over time. It is a full-time profession. I have been shocked at some of the investment portfolios I have seen that lock up a person’s savings into annuities even in retirement plans.

What is even more disconcerting to investment professionals like me is that many people do not keep track of their investment results well enough to make sure they are still on course toward their goals. They just assume the financial plan will get them there. As we all have learned from experience over the last 10 years, investments do not always work out the way we think they will.

The trick is to know when to make a change so that time is not wasted in a bad investment strategy. As I said before, time is your friend when you use it, and that requires close attention to what is going on with the investment portfolio.

With the substantial decline in real estate prices over the last five years, many people near or in retirement have lost a significant portion of their wealth that could be converted to cash for future living expenses. That puts even more pressure on managing their investment portfolios with even more care to ensure enough future financial resources.

So if you have not yet developed a financial plan, make a promise to yourself to do it soon. Don’t put it off. The more years you have before retirement, the better. Even if retirement is just around the corner, it is better to learn the financial truth now.

Don’t be afraid. I promise you will feel better when it is done.

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