Allocation Time Horizon

#SafeMoney #JonHeischmanSr #AllocationTimeHorizon
In this week's episode host Jon Heischman, Senior talks about the time horizons around a retiree's goals and how to set those allocations.

Call Jon at [phone] with questions, comments or to get a free copy of Top 10 IRA Mistakes and How to Avoid Tax Traps. Visit www.heischmanfs.com/ for additional information

Episode Transcript

Speaker 1 (00:02):
People really don't know what their expenses will because they
don't know how long that they're going to live.

Speaker 2 (00:06):
The Americans are worried they won't have enough safe for retirement.

Speaker 3 (00:09):
Now more than ever, retirement's going to cost for many
folks over a million dollars.

Speaker 4 (00:14):
He is no short thing in investing, but a lot
of people think that annuities may come close to that.
It's going to more safe, safe, safe, safe things that
they know.

Speaker 1 (00:22):
If they know they're going to need that money to
supplement the retirement, well then you can't play that rest.

Speaker 4 (00:27):
This is the Safe Money and Retirement Show. But John
Heischman Senior, founder and partner of Heisman Financial Services serving
the Columbus and surrounding areas. John specializes in educating pre
retirees and retirees about safe money strategies and ideas. Now
it's the Safe Money and Retirement Show. Here's John Heischman, Senior.

Speaker 3 (00:48):
Good morning, and welcome to the Safe Money and Retirement Show.
I'm your host, John Heischmann. Before I get started, I
want to give you my contact information in the event
you have questions about today's show, or for that matter,

(01:10):
any questions pertaining to retirement planning. Income planning, and I
can send you any information that is on your mind
or you have a concern about eight eight eight four
two six zero one seven seven. That's the number. I'll

(01:32):
give it to you again, triple eight four two six
zero one seventy seven Heishmann f S dot com. That's
h E I S C h M A n f
S dot com. I'd love to hear from you and

(01:54):
be able to answer your questions or provide you with
any information that you have an interest in. I want
to start out by discussing the time horizons, which is
very important in asset allocation. In knowing the time frames

(02:18):
for the retirees financial goal. Let me give you an example.
If a retiree is in retirement and needs to fund
their retirement for the first three to five years, that
goal would require an asset that will fluctuate a little,

(02:43):
if at all, in price to ensure meeting that goal.
On the other hand, a twenty five year old who
is investing for retirement could invest in both stocks and
bonds because there's plenty of time to ride out the

(03:05):
volatility of stocks. So an allocation of a specific investor
needs to be tailored to that investor's goal. That's what
we have to do and it's part of our planning

(03:25):
here at our firm, Heishman Financial Services. The other thing
I want to look at is when we have a
client who has funds and they're earmarked for a down
payment for a home, maybe a college tuition payment two

(03:47):
or three years into the future, or maybe to provide
cash flow during early years of retirement, may legitimately be
concerned with the possibility of depressed stock prices when he
or she needs the money. This fear was well confirmed

(04:09):
during the two thousand, two thousand and two and October
of two thousand and seven. I know many of you
remember that well and more than likely had some type
of concern about your money when stocks experienced severe bear market.

(04:33):
It's interesting to note that during these same time periods,
treasury securities were experiencing a bull market. So it's very
important to consider the time frame of a financial goal
when deciding what assets to own for that goal, and

(04:58):
one rule of thumb is not to use stocks for
any investment goal with a time horizon of less than
five years. The amount could be less than what your
goal was for that money. On the other end of

(05:20):
the spectrum. The person who retires, let's say, in good
health at age sixty two, with a large nest egg
and says I must invest entirely in government bonds because
I cannot afford to lose principle, maybe losing purchasing power instead,

(05:43):
taxes and inflation will steadily eat away at the purchasing
power of the retiree's nest egg and must be considered.
So a lot of investments in planning has to do
with time horizons and short term goals for a particular situation,

(06:08):
like I mentioned earlier, down payment on the home, college education,
or whatever the reason may be, and typically we're going
to advise to grow that money as much as possible
without risk for that short period of time as I

(06:31):
mentioned five years or under. I've helped and advised many
of my clients pertaining to time horizon issues and it's
been very effective and will work. And I think it's
a situation that needs to be addressed with each client

(06:53):
before beginning any discussions about how to allocate their fund
uns for investments and their retirement planning their income. I
want to determine the time horizon and be attending to
the nature of each client's concerns. If I have a

(07:18):
client that has a long term horizon such as fifteen
to twenty years, but a fear of current volatility, I
will provide education about where that money should go. Also
keep in mind that volatility should not be a major

(07:39):
issue for an investor because of too little risk. I
think this can result in lower increases in net worth.
By taking more risk, higher returns can be achieved. That
more than offsets taxes and inflation, which obviously we need

(08:03):
to be concerned with, and of course those risks, they
need to be sensible by owning high quality stocks and
not chasing the hot stocks that have little substance, as
was the case in nineteen ninety nine and early two

(08:25):
thousand with some technology and telecommunication stocks. On the other hand,
if volatility is a major issue for my client, then
a more conservative approach is most likely in order. And
you've heard me say it many times before. Each client

(08:48):
is different. Their risk tolerance and their risk capacity is
going to be different. But I have to say, when
you understand and time horizon issues, then it could be
a situation where it drastically alders your risk tolerance. That

(09:12):
money that you're setting aside for a particular goal a
time you want it to be there, and typically you're
going to allocate that to a conservative or no risk investment.
Very important to help each client to think logically about risk,

(09:35):
price volatility, or the erosion of purchasing power by inflation.
I think it adds value to each client's investment experience,
and it also incorporates an important ingredient in the asset

(09:57):
allocation process, namely, how a diversified portfolio can counter both
of these possibilities cash fixed annuities and shorter term bonds
to counter price volatility, and stocks to counter purchasing power risk.

(10:20):
So there's details to work out planning, knowing your goals
and objectives for the importance of time horizons in asset allocation,
the only way to really know how you should be

(10:41):
allocated with your money is to have a discussion of
your goals and plans. And that's why I offer a
no cost, no obligation meeting to talk about your situation
and what your roles and objectives are. I can be

(11:02):
reached at a day eight four two six zero one
seven seven Triple Light four to two six zero one
seven seven. At this time, I'm going to take a
short break and afterwards talk about some risk that I

(11:26):
call retirement enhanced risk. So stay tuned. I'll be right back.

Speaker 1 (11:35):
Thanks for listening to the Safe Money and Retirement Show
with John Heischman. For more information, call one eight eight
eight or two six zero one seventy seven. That's one
eight eight eight four two six zero one seven seven,
or visit their website at heischmanfs dot com more of
the Safe Money and Retirement Show in a moment.

Speaker 2 (12:00):
Sequence risk or sequence of returns risk is the risk
when market losses occur early in retirement in multiple years.
Most people have never heard of this term because few
people talk about it outside financial planning circles. Yet preparing

(12:23):
for sequence risk can make or break your nest egg
in retirement, depending on how much money is at risk.
Heischmann Financial Services wants you to be aware and educated
about this retirement risk and show you the options available
to prevent sequence of risk that could affect your future

(12:48):
retirement income. Call me at eight eight eight four to
two six zero one seven seven eight eight eight four
to two six zero one one seven seven.

Speaker 1 (13:04):
Your journey through life ards retirement can be a tricky
path to navigate. A poor decision can lead to serious
difficulty later in life. Choosing the right path requires the
right help. Let Heischman Financial Services keep you on the
path to a safe and secure retirement, one that's happy
and plentiful. Call them today at one eight eight eight

(13:25):
four two six zero one seven seven, or visit their
website at Heischman FS dot com. Click on there, ask
a question tab and you can get the answers to
your retirement questions before they lead you down a precarious path.
That's Heischman Financial Services at www dot Heischman fs dot com.

(13:46):
Or give them a call for a free consultation at
one eight eight eight four two six zero one seven seven.
That's one eight eight eight four two six zero one
seven seven. Welcome back to the Safe Money and Retirement
Show with John Heisman. To contact John, the number to

(14:08):
call is one eight eight eight or two six zero
one seven seven. That's one eight eight eight or two
six zero one seven seven. Once again, here's John Heisman.

Speaker 3 (14:19):
Welcome back to the second part of our show this morning,
Safe Money and Retirement. I'm your host, John Heischmann. I
was discussing time horizons and the importance of having allocations
positioned correctly. So along that lines, I want to go

(14:43):
into enhanced risk in retirement because the act of retiring
actually increases some type of risk in a way. Retirement
enhanced risk are a subset of unsystematic risk, but they

(15:06):
cannot be measured by standard deviation and therefore have received
less academic research and emphasis in the financial service industry.
So we can measure some risk such as sequence of

(15:28):
return risk as well as longevity risk. Some are dramatic
like needy family member risk and health costs including long
term care. Others are slower acting but still there, like

(15:49):
low return risk and afraid to invest after losses have occurred.
So all these risks need to be guarded against because
each one of them can devastate your life in retirement.
And believe me, there is a lot more to your

(16:13):
money in planning your retirement than picking a particular stock
or even a mutual fund. I'm able to recognize these
situations which can create enhanced risk after having a discussion

(16:34):
with a client. So knowing a client's goals and objectives
on and above designing an income plan, I think is
critical for the planner therefore becomes a very important part
of retirement planning retirement. It's a new chapter in everybody's life.

(17:00):
A person who was fully engaged with work in life
suddenly may have a lot of time on their hands
and not much on their schedule. Some deal with this
by becoming very active in the management of their retirement
accounts and other investments, which I think is a good idea.

(17:25):
They check their account balances often, or they'll call me
afterwards with questions, which I encourage with each and every client.
And what I've seen from retirees, those that have a
lot of time and aren't real busy, I seem to

(17:47):
hear from them more than those that are possibly working
part time or have a lot of hobbies very busy
with their schedule. Another would be low return risk, and
this needs to be watched very closely, especially when you're

(18:12):
taking retirement income. And here the major problem with low
returns in a retirement plan is that money will run
out too often. I'll give you an example. Let's say
an investor retires with one million dollars and withdrawals five

(18:34):
thousand per month from a steady investment that's earning five
percent per year compounded monthly. Here the fund will last
thirty five point nine years. If the same steady investment
only earns two percent compounded monthly, the fund is depleted

(19:00):
in twenty point three years. That computes to a loss
of fifteen point six years of income, and that has
to be avoided. And one of the best ways today
is to structure your retirement income or at least a

(19:24):
portion to be guaranteed, so you know what's coming in
now and you're going to know what's coming in twenty
five thirty years in the future. So sources of lifetime
guaranteed income are very important, and as I mentioned, for

(19:47):
all of your income or a portion of your retirement income.
And of course another problem with low returns is they
may not keep up within inflation, and in planning income,
we have to allow for that inflation factor because I

(20:08):
think we're always going to have inflation if you look
at history. The question is how much low returns has
a tendency to tempt the retiree to take more risk
than what their tolerance is because they want to make

(20:29):
up for those low returns and have a tendency to
go into high risk investments, which could be a real
problem in the future. And once again, if a portion
of your retirement income is guaranteed. You don't have to

(20:49):
worry about that. And here's one that you probably haven't
heard of. It's we call it weak defender risk. Here
we're in the same category of low return risk. Bonds
and other less volatile investments are used to play defense

(21:13):
and still could provide an acceptable return in a low
interest rate environment. Bonds don't provide as much of a
cushion in the form of interest. Now, these different risks
that I'm giving you is not something you have to

(21:34):
worry about in retirement. If you're working with an advisor
that is aware and automatically accounts for these different potential
risk you might say it's built into the retirement plan.

(21:55):
The purpose of me educating you out these situations, these
risks is to make you aware that there's more two
retirement planning than just saying, Okay, where's the income going
to come from? Again, you don't have to worry about

(22:16):
these if your plan has, oh, you might say, built
in protection for these. If you're not sure or you
want a second opinion, I encourage you to give me
a call and we can talk about your goals and objectives.
Here's the number eight eight eight four two six zero

(22:40):
one seven seven again triple eight four two six zero
one seventy seven. I can always throw in another one,
and I can entitle that unplanned withdrawal risk from your
retirement plan. And many retirees they're sabotaged by various unforeseen expenses.

(23:10):
Some expenses can be anticipated. Example would be home maintenance
and car replacement. If the average person lives about twenty
four years in retirement, then even the new car they
paid cash for when they retired will have to be replaced.

(23:34):
Home appliances, carpet they wear out. And many people hear
that when they retire they can live on less because
they won't have to save for retirement, and that may
be true. I've seen that with a lot of my clients,
but it's different from having to save during retirement. Retireeees

(24:02):
still need to put money aside for these upcoming expenses,
like the home maintenance and the car repairs or car replacements.
So a retirement budget without an appropriate miscellaneous category for

(24:23):
these expenses is a recipe for unplanned withdrawal risk. If
not a retiree is going to end up borrowing or
taking withdrawals from their retirement plan, chances are it's going
to be a qualified plan like an IRA. They're going

(24:46):
to pay extra taxes for that withdrawal. But more importantly,
as I see it, they're taking away from future income
and growth, depleting that retirement account. Very simply, it has
to be building to your retirement plan. And many times

(25:10):
when I help a client with a budget, we're able
to find some additional money that can be put aside
each month. So I hope I've given you some new
information and something to think about. As I try and
do with every one of my shows. Call me about

(25:33):
your concerns and your questions and we can schedule a
no cost, no obligation meeting. There's no commitment, or if
you prefer, we can schedule time over the phone to
discuss where you're at today and where you want to go.

(25:53):
Thank you for taking the time to tune into the
Safe Money and Retirement Show. I will read turn next
week at the same time bringing you some new information
that hopefully is going to help you have a more
secure retirement. This is John Heischman. Have a great week

(26:15):
and I'll talk to you next week. Thanks again for listening.

Speaker 4 (26:21):
The Safe Money and Retirement Joe John Heisman Senior. To
get in touch with John, call one AA eight four
two six zero one seven seven. That's one triple eight
four two six zero one seven seven. For more information
about Heisman Financial Services, visit their website Heisman FS dot com.

(26:42):
That's h E I S C, H M A n
f S dot com. Join us again next time for
the Safe Money and Retirement Joe with John Heisman Senior