3 Simple Steps to Ensure Your Portfolio Can Support Your Retirement - Root Financial

John and Jane have saved diligently and planned meticulously, but uncertainty looms. Can they retire? Can they maintain their desired lifestyle without the fear of financial ruin? These questions drive the discussion as we stress-test their retirement plan.

First, we acknowledge that retirement isn’t just about reaching an arbitrary portfolio value. It’s about ensuring lasting financial security and peace of mind regardless of market fluctuations. 

Step 1: The “Rough Draft” Plan

We start with the “rough draft” of their financial plan. This initial blueprint outlines their goals, assets, and income sources. We review John’s 401k, Jane’s IRAs, their joint investments, and even the mortgage on their home. This is a snapshot of their current financial landscape, a starting point from which we can chart their retirement journey.

But retirement isn’t just about numbers on a page. It’s about envisioning the life they want to lead and the experiences they want to enjoy. So, we also discuss their retirement lifestyle, their monthly expenses, and their aspirations for travel and leisure. These conversations shape our understanding of what retirement means to them and guide our planning process.

Step 2: Cash Flow Analysis

With their goals and financial details, we move on to the next step: cash flow analysis. This is where we see how their income stacks up against their expenses throughout retirement. From basic living expenses to healthcare costs to their desire for travel, every dollar is accounted for.

As we crunch the numbers, patterns begin to emerge. We see highs and lows in their cash flow, driven by milestones like paying off their mortgage and the start of their Social Security benefits. But perhaps most importantly, we confront the reality of their withdrawal rate.

At first glance, the numbers look a bit daunting. Withdrawing nearly 9% of their portfolio in the first year of retirement seems unsustainable. But as we delve deeper into the projections, we see how expenses decrease, income sources kick in, and the trajectory of their portfolio begins to stabilize.

Yet, even as we find solace in the numbers, uncertainty still lingers. What if the market takes a nosedive? What about inflation? What if healthcare costs skyrocket? Unknown variables like these threaten to derail even the best-laid plans.

Step 3: Probability of Success

That’s where the Monte Carlo analysis comes in. By running thousands of simulations, we gain insight into the probability of success and the severity of failure. 

But we don’t stop there. We explore the impact of potential risks, from Social Security cuts to higher taxes to unexpected healthcare expenses. And we consider the flip side, the potential windfalls that could bolster their financial security.

Retirement planning isn’t just about numbers. It’s about peace of mind, the confidence to embrace the next chapter of life without fear or regret. And as we wrap up our discussions with John and Jane, we’re reminded of the power of preparation, the freedom that comes from knowing that no matter what the future holds, they’re ready to face it head-on.

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