Everyone wants a comfortable and financially uneventful retirement. That helps explain why so many feds struggle to learn if they are prepared to experience a financially stress-free, post-employment life. They wrestle to find reliable information and a clear picture of their retirement futures.
Retrograde Analysis
Retrograde Analysis (RA) is little known technique used by financial advisors every day, yet few federal employees understand how this approach can be beneficial.
To be fair, how can any federal employee be expected to fully understand such an important subject that they (for the most part) have very little practical knowledge about? It is hard to tackle and be successful in any area that is unfamiliar.
Most feds take a linear approach to the topic of retirement preparedness. However, does a straight-line approach alone provide the best results in answering their complicated retirement questions, or are they at risk of falling prey to not knowing what they don’t know?
Thinking Backwards
Retrograde Analysis is an approach that uses reversed methodology. Think of it as a new tool; it has the benefit of providing perspectives that most linear thinkers would normally not consider.
RA is not new or even unique as a general concept. It is likely many have used it without giving it much thought, let alone a name. In our everyday lives, we have problems occur that require we take an opposite and sometimes uncomfortable point of view to resolve. That is the essence of RA.
So, how can RA assist in providing a clearer picture of a fed’s future financial status? Let’s look at a couple of examples.
Example 1 – Linear Lennie
Lennie is a 57-year-old, long-time fed nearing retirement. When Lennie starts developing his retirement strategy, he has more questions than answers, yet pushes his plan forward. He takes a hard look at the potential income and savings he will have available at the end of his work life as well as his estimated retirement savings.
He concludes that he will have a monthly income of $5,000 (all income sources) and a retirement savings of $400,000. His current monthly expenses, which he doesn’t assume will change much before he retires, are $4,500. Note: This is the extent of debt analysis in most linear approaches. This would give Lennie a $500 per month surplus to go along with his $400,000 savings.
10 years into retirement
We won’t dig deep into how inflation alone may have destroyed Lennie’s retirement plans. However, quick math shows that if inflation averages a moderate 3% per year during Lennie’s first 10 years of retirement, his monthly expenses would balloon from $4,500 to over $6,000. That would equate to an $18,000 annual shortfall. ($6,000 – $4,500 = $1,500. $1,500 x 12 months = $18,000). While inflation damage is discouraging, we are going to focus on the impact his linear approach could have.
Lennie took the approach of first seeing how much money he could anticipate having each month in retirement, then he looked at his current expenses and deduced that he would be just fine.
Lennie did not have a fully developed and clear picture of his retirement LIFESTYLE or its overall monthly costs.
For example, he didn’t take into consideration he and his wife’s love of Polo (the horse, not the water kind) in his preparations. He assumed they would indulge in their beloved hobby only as much as they could afford with their “extra money” at the end of each month.
This proved to be an expensive mistake. During retirement, he rationalized the aggressive depletion of his retirement savings with, “I want to do these things while I am young enough to enjoy them.” This is one of the most commonly destructive statements uttered by retired federal employees.
After 10 years, Lennie’s retirement savings were greatly depleted by more than half and concerns were beginning to mount, such as, “Will we outlive our money?” At this point, all may not be lost, but Lennie’s old-age retirement security is beginning to look pretty bleak. I know “Lennies” that find it necessary to take on new jobs well into their 70s.
Example 2 – Retro Ron
Ron took a different approach from Lennie. He started by dreaming about his retirement. He too loved Polo and decided to account for the costs of his hobby by adding each individual expense directly into his retirement plan.
Ron checked into the costs of local club fees – $7,500 annually. He looked into stabling and feed expense – $1,200 per month. Then Ron did the math. To enjoy his Polo hobby, Ron would have to account for (in today’s dollars) $1,825 monthly. ($7,500 ÷ 12 = $625. $625 + $1,200 = $1,825).
He looked at his entire retirement plan in reverse for all of his expenses. In this way, Ron (unknowingly) created a personal “needs analysis.”
Ron knew how much he would require before he knew how much he would have. He then performed an “income analysis” to determine if his income would support his retirement dreams. This allowed Ron to intelligently identify places he needed to improve. He was able to alter his savings allocations, increase his savings each month and set his Goldilocks retirement date well in advance of retirement.
Planning is Essential
Retirement planning can be difficult. Many feds feel completely overwhelmed, uncertain and often nearly paralyzed by the very thought of developing a retirement plan, ultimately putting it off as long as possible. However, at the end of the day, it cannot be ignored, only postponed.
If properly used, RA has the capacity to improve financial success during retirement years, potentially help uncover prospective problems before they are problems, and alleviate at least a portion of the suffocating uncertainty.
Quick synopsis
- Look at your retirement plan from different views. Linear, backwards and from the side.
- Create a CLEAR picture, before you retire. Determine what your retirement dream will cost, before finding out what you can afford. Then strive to meet that goal.
- Always try to poke holes in your plan. Then strive to plug your plans holes?
- Start preparations as soon as possible. Generally speaking, the earlier your retirement plan is treated well, the better your retirement plan will ultimately treat you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.
