MAKING CENTS: Stress test your forecast for retirement

With an eye toward summer vacation, this is a good time of year to think about how you would spend your time if every day was vacation.

For many, the goal of not working some day is still alive. Retiring isn’t what it used to be, however.

Today, retirees want a lifestyle that may be more active than their lifestyle while working, and that scares them. Most are keenly aware that the lifestyle costs when you are done working may be even higher than they were while you were working.

Forecasting is the first step of assessing the consequences of working less and spending more. It starts with your cost of living as you know it today. Be careful to not underestimate this amount. Your ultimate “proof” of the number is to look at the total amount that leaves your checkbook every month. Count your ATM withdrawals in that amount you will call your total cost of living.

Next, add the wish-list items. Quantify the cost of your lifestyle while not working. To make this data a forecast, simply apply a net rate of return on assets and investments and choose an inflation rate to grow your cost of living. It’s fairly simple math, but here are some ways that many forecasts get thrown off track:

The first way is to make incorrect assumptions. Just like our federal government now imposes stress tests on banks, you ought to perform a stress test on your personal financial well-being. You should test your forecast the government does banks -- with a higher rate of return and a higher inflation rate. Do not wait for any of these possibilities to come true. It is best if you know in advance the consequences from your stress test activities, should those situations arise during your lifetime.

Add in a few of life’s predictable obstacles. Matters such as healthcare emergencies, loss of employment or a child needing assistance will throw off the most accurate forecast. For the healthcare part, stress test your forecast by factoring in the material cost of long-term care insurance and the consequences of an uninsured long-term illness. If the former looks OK, consider making the purchase. If not, consider alternative forms of protection including at-home family care.

Understand what you need from your assets. Many people are walking around with a collection of investments and following the markets as if their life depended on it. Some are taking more risk than is needed and some aren’t taking enough risk to generate the desired rate of return. Construct a portfolio that will attempt to find as little volatility as possible within the confines of your desired rate of return.

Don’t forget taxes. With rates higher than in past years, pay attention to the location of your assets and the timing of your buys and sells. A little extra attention to tax matters should be beneficial in today’s world.

 John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

Making Cents: Right answers usually aren’t easy ones

The most common answer delivered by financial professionals to their clients is “it depends". For some, it may be a quick way to skirt a direct answer. But in many financial situations, there is no black-and-white answer.

Let’s start with estate planning, an area where many feel that a set-it-and-forget-it approach is best. Nothing could be further from the truth. With the potential end to the Bush-era tax cuts looming, many wonder whether now is the time to engage in the $5 million substantial-gifting opportunity available under the current tax code.

Of course, much depends on what Congress does. But beyond the tax law, you may have concerns about your future ability to sustain your current lifestyle if you make such a large gift. You would also need to ask what can go wrong to make this gift look like a bad idea at some point in the future. These issues could include a long-term health issue that depletes funds faster than expected or, conversely, a much longer life than originally projected.

The “it depends” answer may also arise when planning for the funding of higher-educational expenses. The first side of this quandary deals with how you prioritize saving for your financial independence and other financial goals versus paying for four years of a private university. Then there are the realities of your future income, health and the earnings rate on your savings. Look at all contingencies and conceivable ways to fail before you charge ahead with your own ideas. Should you choose college funding as your first priority, it would be negligent to be underinsured to protect against the loss of life or income. Either possibility could cause failure of the funding plan. Diverting a small portion of your savings to possible contingencies for premature death or disability may be a prudent course of action.

If you choose to make financial decisions in a vacuum, then at least be aware of the possibilities of how your plan may become derailed. For example, holding on to an investment because you inherited it from your dad or because you’ve always owned it doesn’t mean that you should always own it. You’ll need to ponder the future of your current holding and weigh it against the alternatives you’re considering. Further conflict may arise if you ask whether capital gains taxes will be higher or lower next year.

There is a yin for every financial yang. Evaluating all of the possibilities with the help of a financial professional is the best you can do.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth
Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.