Retirement Income Redesigned: Master Plans for Distribution: An Adviser's Guide for Funding Boomers' Best Years

Chapter 6. Lifelong Retirement Income: How to Quantify and Eliminate Luck

jim c. otar

Luck in investing is one of the most elusive factors to quantify. On the one hand, we strive to portray our fledgling financial-planning profession as a science. We talk about "scientific" studies^[25] and research that conclude that "asset allocation accounts for more than 90 percent of the variation in a portfolio's investment return." On the other hand, when I open new accounts for clients, their parting words at the end of the meeting are invariably, "I hope we get lucky and our retirement savings last for as long as we both live!"

Most of us know the important role luck plays in retirement planning. We avoid talking about it because we don't know how to deal with it. After all, how can we gain the respect of our clients if we use terms like "luck" or "kismet" to describe their financial future?

In this chapter, we'll look at luck and all its aspects and how it plays havoc with retirement plans. We'll expose some of the misconceptions in retirement planning and present crystal-clear solutions for planning lifetime income. But first we must define and quantify luck's contribution to planning.

A Balancing Act: Assets and Cash Flow

The mathematics of retirement is simply a matter of balancing retirement assets and retirement cash flow. Think of it as Hoover Dam, holding huge quantities of water (retirement assets) and releasing some of it as needed (cash flow). First, we need to figure out what affects ...