One of the problems with most retirement plans today is they address only two of the three key issues.
The two that are typically addressed are:
- Pre-retirement asset allocation.
- Post-retirement asset allocation.
The one usually not addressed is:
- The order in which assets are accessed for retirement cash flow that produces the best long-range net worth and wealth to heirs.
Why is #3 overlooked? It’s simple -- until now, no one has had the algorithm for this very complex calculation.
Example:
Simon and Ann Scott, age 55 and 50, plan to retire in ten years.
They currently have $6.5 million in liquid assets set aside to support their after tax, retirement cash flow requirements of $25,000/month indexed at 3.00% as an inflation offset.
These assets include just five different allocations, each earning a different yield and each subject to different taxation.
They are very concerned about prioritizing the order of accessing those assets for cash flow in order to maximize their long-range net worth and wealth to heirs.
Let’s assume we run an analysis to their ages 95/90. That’s 40 years with five different asset allocations with each of the required 4,800 calculations generating the desired yearly cash flow. If we run a factorial solve, we can test all the different prioritizations possible with these five allocations.
A factorial solve with five asset allocations with 40 year-by-year separate calculations requires:
1 x 2 x 3 x 4 x 5 = 120 x each year for 40 years =
4,800 comprehensive calculations
in order to determine the prioritization that ends up with the worst results:
(Strategy 1 - Bad Logic)
and the one that produces the best:
(Strategy 2 - Good Logic).
Note: With six asset allocations, it’s 28,800 calculations; with seven, it’s 201,600, with ten, it’s 145,152,000, etc. (Don’t try any of these with Excel.)
Does the order of accessing assets really make that much of a difference? You bet it does! InsMark’s Wealthy and Wise® software has the algorithm to perform the calculations for Simon and Ann in about two seconds.
Below are their results. (You do not want another adviser showing this logic to your clients who could then ask you, “Do you know about this? How come you didn’t show it to me?”)
Click here for an 8-minute video for details on how this strategy works within?Wealthy and Wise®. (On the video, click on this icon 
?for maximum screen resolution.)
Click here to learn more about InsMark’s Wealthy and Wise. You can also contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275). Institutional inquiries should be directed to David Grant, Senior Vice President - Sales, at dag@insmark.com or 925-543-0513.
If you are licensed for InsMark’s Wealthy and Wise® and would like to review the menu prompts we used for this analysis, please email us at bob@insmarkblog.com, and we will get the Case Data file (Workbook) right out to you. (Be sure to ask for the Workbook for Blog #35: “Revisiting the Pothole in Wealth Planning”).