The Pert Near Goof Proof Retirement Plan

     Too much has been written on how the economic global meltdown has devastated portfolios and not enough has been offered to reassure people  that they can indeed plan and be on track for retirement.

The Pert Near Goof Proof Retirement Plan simply copies, on a modified basis, what has been used by corporate and government pension plans for years. Before the defined contribution retirement plan there was, and still are in some organizations, defined benefit plans. When first introduced the 401k was never designed to be the only retirement plan until corporations and institutions discovered they could use it to get out from under pension  obligations by eliminating one and instituting the other. The 401k has switched risk, contribution and responsibility to the employee from the employer.

If you use the basic plan of a defined benefit pension you can create an almost worry free personal retirement plan. The secret is not so much in what to invest but how much to invest and the return on that investment. Given time and a reasonable attainable rate of return anyone can do this and it takes but minutes to recalculate and keep one on track.

Corporate pension managers managed defined benefit plans using a more complex formula but the basics work for those that want a way to stay on track and have a definite goal. This method eliminates hunting for the perfect fund, maximizing returns and worrying about risk and all such foolishness.

Defined benefit pensions were designed to fund a specific income or lump sum for an employee when reaching a particular age or number of years of employment. The premise was to provide an employee with a lifetime fixed income beginning at a certain age and then work out a formula on how much to set aside to provide it.

Lets say you want one million dollars accumulated by the time you retire in 30 years. You assume a consistent 5% per year return on investment. The calculation will tell you that you need to invest $15,051. per year for 30 years to reach your goal.

This assumed rate of return is not only reasonable but achievable over the long term. The bad news is that nothing works in a straight line and your portfolio may experience economic crashes, as we all did a few years ago. Let’s say that was you a few years back with a portfolio loss of 37% and you were 14 years into the plan.

If you recalculate how much you need to invest after the crash and at your new portfolio numbers you’d discover you have to increase your contribution to $28,134.  to stay on track to reach your goal of one million dollars. Assume you have the wherewithal to do this. The following year the markets recapture some of the previous year losses and so you have to recalculate again your remaining years working and find you now need to invest $23,402 per year for the next 14 years (assuming nothing changes) to get to your one million dollar goal.

There is no such thing as a plan failing. It is all about an investor’s determination to keep it on track.

Unless the markets make a drastic uptick you may consider that an additional $8,000 each and every year is too much of a strain on your budget. Your next calculation is to either reduce your dollar goal or increase the number of years to work and save. By increasing the remaining years from 14 to 17 you will still achieve your goal of one million dollars and keep your savings outlay at a reasonable $14,447 per year. Naturally you still recalculate how much you need to save each and every year.

There are other variables that you can input into your plan design. You can increase your rate of return from 5% to 6% (if you think that’s an appropriate and reasonably attainable number) or you can decrease the number of years you have to save, or decrease the amount of money you wish to accumulate.

What happens if in one year or several you should earn far in excess of your projected rate of return? As some of my east-side friends say, ‘Forgetaboutit’. Earnings in excess of projected rates of return are not counted when the time comes to recalculate the next years contribution. This excess is there as a cushion for the probabilities of future unforeseen market corrections. The next year contribution remains the same as the previous year. Another idea is that investors may, if they desire, move those excess returns into money markets to be used when markets fail to perform.

Most people manage their retirement plan the way I hit a golf ball.  They are all over the course. Keep it simple and here’s a recap:

• Pick a dollar goal, retirement time frame and reasonable rate of return.
• Establish a simple allocation.
• Check and recalculate your contribution once a year.
• Either increase annual contributions or recalculate number of years to retirement or the total amount you plan on accumulating after severe market declines.
• Don’t readjust contributions during spectacular total return up years.

Anyone who has played blackjack or poker will tell you that it is the money management that ensures whether you win or lose and not so much the cards, although they certainly help.  You can lose two hands out of every five and still be a huge money maker. The same is true in pension management. You can have some of the most horrific fund selections and terrible economic times but if you manage and adjust to situations  you can be successful.

 If you have questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.