Morgan Stanley
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Retirees: Don’t Crack Your Nest Egg

Wealth planning doesn't end on the first day of retirement. Avoid these common mistakes to safeguard your portfolio.

Picture this: You’ve managed to diligently accumulate a healthy nest egg, only to find your assets rapidly depleting two or three times faster than you’d planned once retirement begins.

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The truth, says Morgan Stanley Private Wealth Adviser A.J. Fechter, CFA, is that no matter how well you save pre-retirement, it’s just as critical to have a solid plan for your assets after you retire.

Even the smartest and most successful among us are prone to what A.J. calls "judgment risks," which can pose a bigger threat to a portfolio than market risks.

But A.J. says five of the most common judgment risks can be mitigated with a well-crafted plan:

1. Make Accurate Assumptions

Couples often expect to downsize once retired. But when the time comes, the opposite is often the case. Even if they move to a smaller home, many retirees choose to live near leisure opportunities, which may put them in a more costly area with higher expenses, A.J. says.

A recent “Entrepreneurs Forum,” hosted by Morgan Stanley Private Wealth Management, gathered business founders to network and hear from the experts on a variety of topics that got to the heart of entrepreneurial motivation, communicating vision, raising capital, setting business goals, as well as personal financial management.

A recent “Entrepreneurs Forum,” hosted by Morgan Stanley Private Wealth Management, gathered business founders to network and hear from the experts on a variety of topics that got to the heart of entrepreneurial motivation, communicating vision, raising capital, setting business goals, as well as personal financial management.

”Retirees think, 'I can live on $100,000 a year, but I need $20,000 to replace my roof this year.' The next year it's '$100,000, but I need to replace my car for $30,000,’” A.J. says. In order to figure out how much cash flow you truly need, it's important to create a worst case scenario on “extraordinary” expenses needed over at least the first five years of retirement.

2. Beware of Hasty Decisions

Just ask Shazi Visram, founder of Happy Family Brands, a maker of organic food for infants and children. She started her business in 2003 to bring healthier food to children worldwide. “I was going to change the world through business. I think the answer is to start kids out with healthy organic food. I made it my mission to change the way children were fed.” Today, Happy Family Brands is the #1 organic baby food company in the U.S. market, but to get there Visram accepted checks as small as $25 in the early days of fundraising.

Just ask Shazi Visram, founder of Happy Family Brands, a maker of organic food for infants and children. She started her business in 2003 to bring healthier food to children worldwide. “I was going to change the world through business. I think the answer is to start kids out with healthy organic food. I made it my mission to change the way children were fed.” Today, Happy Family Brands is the #1 organic baby food company in the U.S. market, but to get there Visram accepted checks as small as $25 in the early days of fundraising.

Another potential error is moving to be near grandchildren without taking into account that the younger generation may end up relocating themselves. An additional possible pitfall is purchasing an asset that will depreciate quickly such as a recreational vehicle or boat, without really knowing if it will suit your retirement lifestyle.

Besides renting first, A.J. says, purchasing conservatively lends flexibility if your dream of retirement doesn't match the reality.

"That means not buying the biggest, most expensive house in the neighborhood, because generally those [houses] are going to be the hardest to sell if you need to move."

3. Resist Panic Selling

One of the most common types of retirement planning risks is panicking after a market drop and pulling out of the market. While you’re bound to feel some anxiety as you transition from a steady paycheck to savings and investments, the urge to cut and run could increase your losses.

A good financial adviser will remind retirees that market fluctuations are something they planned for, and not an unexpected roadblock that should lead to a kneejerk change in strategy.

"The market could be down 10 percent any time. It's like living in Minnesota and being surprised when winter comes," A.J. says.

Skilled financial advisers can help retirees craft portfolios that deliver cash flow even through market fluctuations.

4. Factor in Health Care Expenses

Only 28 percent of employers provided retiree health care coverage in 2013, compared to 66 percent in 1988, according to Morgan Stanley's Health Care Cost Evaluation. Out-of-pocket expenses not covered by Medicare will total nearly $300,000 for the typical couple that retires at 65 and lives 20 more years.

"Often people tend to overlook these factors in their planning," A.J. says.

This hard reality means that retirees should be aware of expected health care inflation as they create a sound financial strategy. A sound plan will help retirees calculate how much income their portfolio will need to generate in retirement to keep pace with health care costs.

5. Set Realistic Expectations

No one knows what the market is going to do, but a financial adviser should be able to help you develop realistic expectations for your portfolio's growth. Both overconfidence and lack of confidence can be hazardous to your wealth, A.J. warns.

Overconfident investors may be tempted to spend too much, counting on growth larger than their particular portfolio is likely to generate. When the market has been on a bull run, it's tempting to expect it will keep going, Fechter says.

Lacking confidence is a less obvious danger but also worth noting: Those who fear loss too much may be unwilling to take on the appropriate amount of risk.

"Under those circumstances, you're potentially putting yourself in a position for your cash flow and portfolio growth over time to not keep up with inflation, so you could wind up depleting your investments and principal over time," Fechter says.

By carefully crafting a strategic plan and accounting for common “judgment risks,” you’ll be able to accurately estimate your goals, lifestyle and financial needs for a successful retirement.

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