The Lifeproof Retirement Manifesto
Our Core Principals and Values
The Lifeproof Financial Retirement Manifesto is a declaration of the core principles and values we use to help you build your financial future.
Our hope is you will adopt and adapt it as a guide to prioritize what’s important to you and what you want to achieve. Think of it as our ultimate bucket list for wealth building, utilization and preservation.
So why write one?
A financial manifesto helps keep our priorities focused. There are days we may not feel 100% or when all the whitenoise tries to pull us off course. We hope this manifesto will also serve as additional encouragement to you, where you can remind yourself what you’re capable of, and what you’re working towards. (This can be especially important for the financial goals you’re working toward, as they can take a lifetime to achieve!)
Let’s get started….
Focus on Long-Term Objectives
A solid financial plan should be focused on planning to live, rather than planning to die. Whether still in your working years, or into retirement, there is always a careful balance between enjoying life now and saving for the future.
To succeed, don’t plan only until life expectancy; By definition, half of people will live longer, some significantly longer. Unfortunately, planning for longer living means spending less than you otherwise would, making other parts of the plan even more critical.
Agnostic Approach To Retirement Income Tools
Financial services professionals are generally divided between two camps: investment solutions and insurance solutions. Both sides have a dogmatic approach who see little use for the other side. However, the most efficient retirement strategies require an integration of both investments and insurance.
It is potentially harmful to dismiss retirement income tools without investigating their potential roles. Because of this, it is wrong to describe the stock market as a ‘casino’ or to dismiss annuities or permanent life insurance as ‘expensive and unnecessary’.
For the two camps in the financial services profession, it is natural to accuse the opposite camp of having conflicts of interest that bias their advice, though each side has their own conflicts that influence their advice.
On the insurance side, the natural conflict is that insurance agents receive commissions for selling insurance products and may only need to meet a requirement that their suggestions be suitable for their clients.
On the investment side, those charging for a percentage of assets they manage naturally wish to make the investment portfolio as large as possible, which is not necessarily in the best interests of their clients who are seeking sustainable lifetime income and proper retirement risk management.
Meanwhile, those charging hourly fees for planning advice naturally do not wish to make their recommendations so simple that they forego the need for an ongoing planning relationship.
It is important to overcome these hurdles and to rely carefully on what the math and research show. This requires starting from a fundamentally agnostic position.
Plan For Efficiency, Not Accumulation
The highest performing plans are most efficient when you will be using it. The holy grail of retirement income planning is finding strategies that enhance retirement efficiency.
I define efficiency as follows: if one strategy allows for more lifetime spending and a greater legacy value for assets relative than another strategy, then it is more efficient.
Efficiency must be defined from the perspective of how long you live. As such, a number of strategies can enhance efficiency over the long term (but not necessarily over the short term) with more spending and more legacy.
As your wealth grows, inefficiencies will significantly impact your standard of living either by:
- diluting gains (annual fees),
- reducing safe withdrawal rates due to portfolio volatility (i.e. market risks), or by
- depleting it faster during the spend-down phase (fees, taxes, inflation).
When comparing costs, always focus your attention on lifecycle costs, with greatest efficiencies occurring at the end of the life cycle, where your wealth and distributions are largest.
Resist the temptation of putting too much emphasis on short-term gains, as they often come with high long-term costs. Conversely, some strategies that may seem expensive in the short-term will achieve the greatest efficiencies over time.
When considering efficiencies, remember there are costs you can control (fees), costs you cannot (inflation) and costs you can strategically avoid/delay/prepay (taxes).
Plan Should Be Integrated To Manage Major Risks
An ideal financial plan determines how to best combine available financial tools to maximize income goals and protect from various financial risks, including:
- Longevity Risk (unknown life expectancy)
- Market risks and Volatility
- Inflation Rates
- Increased Tax Rates
- Serious Illness / Long-Term Care
- Spending Shocks
- Death
Building a retirement income strategy is a process that requires determining how to best combine available retirement income tools in order to meet retirement goals and to effectively protect against the risks standing in the way of those goals.
Each of these risks must be managed by combining different income tools with different relative strengths and weaknesses for addressing each of the risks. There is no single solution that can cover every risk.
Use Reasonable Expectations For Portfolio Returns
Don’t expect average investment returns. By definition, it’s certain that half will experience below-average investment returns throughout their investment lifetime. Therefore, it is paramount to temper expectations and have a plan structured to work successfully with below-average returns.
Bonds provide a fixed rate of return when held to maturity, and stocks potentially offer a higher return than bonds as a reward for their additional risk. Mathematically, a higher assumed future market returns imply higher sustainable spending rates. Retirees who rely solely on investment portfolios spend more today because they are planning for higher market returns, but risk premium is not guaranteed and may not materialize.
For retirees, the fundamental nature of risk is the threat that poor market returns will trigger a permanently lower standard of living. Retirees must decide how much risk to their lifestyle they are willing to accept. Prudent planning assumes a risk premium on stocks will be earned and spending more today is risky behavior.
It may be reasonable behavior for the more risk tolerant among us, but it is not a behavior that will be appropriate for everyone. It is important to think through the consequences in advance.
It may be reasonable behavior for the more risk tolerant among us, but it is not a behavior that will be appropriate for everyone. It is important to think through the consequences in advance.
Your Minimum Lifestyle Needs Should Be Guaranteed
A ‘personal pension’ should be considered to cover basic lifestyle needs, leaving other assets for lifestyle enhancements and legacy giving.
Typical retirement portfolios are guaranteed to have low investment returns because they use assets with market risk. These market risks require a very conservative portfolio to avoid substantial losses and ensure not running out of money.
Another important implication of relying solely on an investment portfolio is, though it is a liquid asset, some of its liquidity may be only an illusion. Retirees are free to reallocate their assets in any way they wish (allocation liquidity), but the assets are not truly liquid because they must be preserved to meet the spending goal .
Alternatively, using investment tools that guarantee income may give up ‘allocation liquidity’ for a period of time, but doing so avoids market, inflation, and longevity risks. The remaining portfolio assets can remain in more flexible and volatile assets, potentially enhancing lifestyle spending and legacy giving.