Tuesday, September 29, 2020

In my last article, I highlighted the importance of establishing a financial plan in order to map out a path toward long-term financial security. Moreover, I demonstrated how savings and investment strategies are indispensable facets of creating a glide path toward enjoying a couple’s retirement years. This segment will focus on how the financial planning process morphs as one approaches retirement and how to ensure that the couple does not outlive their nest egg.

Many people ask their financial advisor: “How much do I need to retire?” The answer to that question is that there is no precise number because of the many variables that go into that calculation. These factors can differ widely depending on unique circumstances including the amount of guaranteed income from social security and pension plans. Moreover, factors such as expected longevity and cost of living also play critical roles.

With regard to Orthodox Jewish couples, the income required in retirement will likely be higher than the average retiring couple due to many of the same elevated costs suggested in previous articles. They will have higher food bills because of kashrut observance. They are likely to maintain residence in states, cities and neighborhoods that have higher than average taxes and cost of shelter. Most will want to continue their charitable giving activities.


To establish a financial plan for retirement, couples should consider a number of other key considerations including: What are the discretionary expenses? How much are the total investable savings? What is the risk tolerance for those investments? Are there any large discrete inflows (e.g., inheritances, sale of real estate holdings or businesses) and outflows (e.g., weddings, gifts to children and grandchildren)? When will those inflows/outflows take place?

Our firm has developed a sophisticated proprietary planning tool that can shed light on the couple’s long-term financial trajectory. Many other assumptions are incorporated into the modeling process including investment returns, market volatility, required minimum distributions on qualified retirement accounts and inflation expectations. Because these factors introduce new layers of uncertainty, we recommend modeling a number of scenarios, including an “expected” scenario as well as a “conservative” scenario.

Putting the Plan in Motion

Let us refer back to the Modern Orthodox Jewish couple that we used as an example in last week’s article. With a consistent savings plan via a company 401(k) plan over a 40-year period, we estimated that the couple could realistically accumulate $3 million in plan assets by the age of 65. (We had assumed an annual total return of 8.85%, which represents the lowest rate of return for the S&P 500 index for any 40-year period since 1926). And let us say that the couple chooses to reduce the investment risk of the portfolio at retirement by evenly dividing the portfolio between stocks and bonds. Using an annual inflation rate assumption of 2% and an annual portfolio return assumption of 6.29% (reducing the rate of return assumption due to the fixed income component, which we are assuming at 3.73%), a withdrawal rate of $125K per year, our model projects an approximate 88% chance that the couple will not exhaust their assets by the age of 95. Moreover, there is a probability of approximately 64% that the account will actually increase in value over that time frame (of course the buying power of that $3 million will decrease due to inflation).

A robust plan should also include scenarios with significant one-time inflows to or outflows from the portfolio. For example, if the couple expects an inheritance in the next several years, that should be included in the plan. Conversely, if the couple plans to provide financial support to the next generation, whether through tuition assistance, helping pay for summer camp or family vacations, that would also be an important factor in determining the couple’s ability to outlive their assets.

Before jumping to any conclusions from the plan modeled above, one should consider the many uncertainties inherent in the model such that the results can never be absolutely precise. External factors such as a higher than expected inflation rate will reduce the probabilities of success. Over the 30-year span (maintaining all other assumptions constant), if the inflation rate averages 4% rather than 2%, the probability of outliving those assets falls from 88% to about 63%.

Challenges Unique to Contemporary Circumstances

We are privileged to be living at a time when lifespans on average are longer than previous generations. According to recent Social Security Administration data, there is a 48% chance that one spouse of a married couple will live past the age of 90. There is a 20% chance that one spouse will live past the age of 95. That would suggest that a conservative financial plan would account for longer lifespans.

Our assumption about future inflation is based on recent inflation data. Those of us who lived in the 1970s can recall a decade in which consumer prices were rising as high as 10% per year. While 10% inflation is certainly not our base case, one should consider modeling scenarios with rates of inflation higher than the average in recent years. (The average annual inflation rate since 2000 is approximately 2%).

One of the greatest uncertainties in our modeling process is the expected portfolio return on investment. The stock market is trading near all-time highs. And interest rates are near the lowest levels on record. Even if stocks perform as well as they have historically, we believe that bonds are extremely unlikely to generate annual returns similar to the past few decades. The reason is that the potential for generating high levels of income and/or capital gains have been greatly diminished. Thus, I would suggest using even more modest return assumptions in the conservative scenario.


Retirement planning presents a unique set of challenges. Moreover, there are many uncertainties that make the plan merely an initial roadmap, but by no means a firm blueprint. Therefore, annual reviews of the plan are critical to success. By monitoring the plan annually, retirees will have ample opportunity to make the necessary adjustments to their budget and investment strategy to help get their financial plan back on track.

Jonathan D. Caplan, a former Wall Street executive, is president and founder of wealth management firm Caplan Capital Management, Inc. with offices in Highland Park and Hackensack. He holds a BA from Yeshiva University and an MBA in finance from New York University Stern School of Business. You can find other recent investment articles by Jonathan at www.caplancapital.com/blog.

Sample scenarios used in this article are hypothetical illustrations shown for informational purposes only. They do not represent any client experience and do not predict any performance of an actual investment. As with any investment, there is always a possibility of loss, including the loss of initial investment. Please ensure you understand all risks associated with any type of investment.