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Dr. Evil Was a Lousy Financial Planner

Do you remember the movie Austin Powers: International Man of Mystery?  Mike Myers plays Dr. Evil, who awakes from a 30-year sleep and wants to blow up the world unless he is paid… 

$1 MILLION DOLLARS!

The joke is on him as he did not take into account decades’ worth of inflation.  My guess is that he probably didn’t take into account taxes as well.  And that’s the problem with Dr. Evil’s approach to financial planning.  

We see the Dr. Evil approach used in real life as we talk to prospective clients.  A typical thought we hear might be:

“We’ve saved $1 MILLION DOLLARS.  And we spend $100,000 a year.  But half of that is covered by social security.  So we can withdraw $50,000 a year for 20 years from our investments and we’ll be ok, right?”

Not exactly.  Here's why.

A big chunk of the $1 MILLION DOLLARS might be in a retirement account.  Did they take into account taxes on their distributions?  Higher spending over the years due to inflation?  Extraordinary items?  Fluctuating market returns?  Probably not…

A More Effective Approach to Financial Planning

Financial planning, at its most basic, incorporates decisions regarding saving, spending, and investing.   It takes into account taxes and inflation, and projected (hopefully conservative) portfolio returns.  It should be customized to take into account unique circumstances such as “one-time” major expenses, potential inheritances, life insurance, etc.

A successful plan will be able to address your most important financial questions:

  • Can I maintain my lifestyle during my retirement years?  
  • How much can I spend?
  • How much risk should I be taking?


Financial plans should incorporate simulations of a variety of market outcomes ("Monte Carlo" analysis) to estimate the likelihood of achieving specific goals over time, rather than assume the same return every year. Several different scenarios should be modeled, such as looking at the impact of retiring sooner rather than later, or comparing alternate spending levels during retirement.

Plans should also look at specific "wishes".  What if you bought that vacation condo, with its related expenses?  What if you increase spending for the first decade of retirement as you contemplate increased travel?  

Our objective is to implement a plan – incorporating both investment risk and spending - that offers a very high probability of success.  And that plan needs to be updated over the years. As your life and circumstances change, we need to reflect those changes.

The benefit is the peace of mind that comes from knowing you are on track to achieve your goals.  We have been using this financial planning methodology for years, and love to see the stress leave a client's face when they see they have a road map for a comfortable retirement.

Dr. Evil may be oblivious about with financial planning... but we're not.  We would like to provide you with a higher level of confidence in meeting your future financial goals.  Please contact us if we can help with your financial planning.  


                                   
               
             
               
             
               
             
                             
                           
                             

The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.