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$mart Money: The Institute of Advanced Financial Planners Symposium 2010

Recently I attended the Institute of Advanced Financial Planners annual symposium. I always enjoy this conference. It's got its own special vibe.

Recently I attended the Institute of Advanced Financial Planners annual symposium. I always enjoy this conference. It's got its own special vibe.

If a person was going to make a generalization, the Institute of Advanced Financial Planners is the one that the eggheads attend. Some of these guys are painfully smart; the type of people that read the dictionary for fun.

I don't mean that in a negative way. Just that if there happened to be a Mensa meeting happening in the same hotel at the same time, there would be some direction needed as to what session it was that people were supposed to be attending.

You can tell a lot about an audience by the type of questions they ask. These guys are asking high-level, esoteric questions. Not questions about the presentation per se, but rather intelligent debate about the perspective. This crowd wants the gory details.

One of the interesting things that I noticed at the conference was that, despite the expertise and experience of the group, everyone was taking notes. Some of the smartest minds in the country, and they never stop learning. Interesting.

The conference was three days in length, and focused on a case study of a business owner looking to transition into retirement, but I'm going to boil it down to just two presentations that I think capture the essence of much of financial planning, regardless of the circumstances of the client.

One of the presentations was technical in nature. Jim Otar has an engineering degree in addition to being a Certified Financial Planner, and he spoke about designing lifelong income strategies.

Otar discussed market history over the last century, and took a purely mathematical look at retirement planning; what are the chances that someone will outlive their money given various scenarios, and how to position the portfolio appropriately.

At the end of exhaustive study, Otar can draw some conclusions. One conclusion is that when a person is in the stage of life where they are still accumulating money for a future retirement, the most important variable of all is managing the volatility of the portfolio so that the client remains fully invested.

This is an interesting conclusion. It has nothing to do with rates of returns, or inflation, or asset mix, but rather about the ability to stick to the plan. If a person loses their nerve and bails early, the quality of the underlying investments is irrelevant.

In retirement, once a person begins to withdraw their retirement assets, there are a few interesting, and perhaps unexpected, important variables.

Regardless of the circumstances, the most important variable in the withdrawal stage is the withdrawal rate. Anything over a 4 percent withdrawal rate is potentially problematic. In other words, if a person is able to save $100,000 for retirement, the most that they can take out from their investment and still have a pretty decent shot at not running out of money later on is around $4000 per year. Interestingly, more obvious variables such as asset mix and inflation rates, while still important, are not the variables that have the biggest impact statistically.

The second most important variable in the withdrawal stage is the sequence of returns. Any extended bouts of negative performance early in retirement had a disproportionately large impact on whether or not a person runs out of money later on.

The first four years of retirement are critically important. Otar's message was not to take unnecessary risks with your money during this time, and be careful not to overspend or give too much money away. Later on you can go ahead and live it up, but be careful with your pennies early in retirement.

The second presentation that I'm going to recap was by Barry LaValley. Mr. LaValley's presentation didn't have any math in it at all. It was about the transition into retirement. While Mr. Otar spoke about the objective, dollars-and-cents, side, Mr. LaValley spoke about the subjective, what-do-you-want-to-do-with-your-life, side.

People often know what they are retiring from, but often they don't know what they are retiring to. Thus retirement is often accompanied by a sense of loss.

After all, to a lot of people their employment is an important reference point - often the most important reference point - for how they define themselves. This is easy to confirm. Ask someone to tell you a little about themselves, and what do they say?

Probably they are going to refer to their occupation. After decades of thinking about yourself as a function of what you do, to not have employment as a frame of reference anymore can be disconcerting. Some people even equate the ceasing of employment to a death.

Mr. LaValley spoke about helping people clarify what their vision of retirement is. The cursory objective for a retirement might be along the lines of someone saying that they want to buy an RV and do some travelling. But digging a little deeper there are some common emotional needs for people as they move into the retirement stage of their lives; the need for safety, the need to be wanted, the need to be independent, fear of change, freedom from stress, and even guilt can be a powerful motivators behind why a person wants to do what they want to do.

And that, my friends, is financial planning in a nutshell. Even for us self-confessed financial geeks. There are the hard facts, and then there are the attitudes and personal quirks that people have, and the objective of financial planning is to move you from where you are to where you want to be.

The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Certified Financial Planner with Manulife Securities Incorporated, Member CIPF and with Manulife Securities Insurance Agency in Fort St John, BC. Brad Brain can be reached at brad.brain@manulifesecurities.caor

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