Question Your Ideal Investment Option

Physician's Money DigestOctober15 2004
Volume 11
Issue 19

Before you're going to make any type ofinvestment recommendations, a financialadvisor should conduct a comprehensivefinancial physical before recommending aspecific course of action to follow. Now, the questionarises: What should be involved in this process?

Vital Questions

Your financial planner should ask you several significantquestions before they recommend any typeof investment. Up to this point, what have you accumulatedin financial assets that are earmarked forretirement? Of those assets allocated toward retirement,which ones are post-tax investments, pretaxinvestments, and tax-sheltered investments? In whattypes of financial vehicles are those assets invested?What is your current tax bracket? How much areyou saving annually toward retirement on both apretax and post-tax basis? In how many years doyou wish to retire?


As a percentage of your current income, assumingwhen you retire you have no financial obligations,how much will you require annually pretax duringretirement in today's dollars? The general rule ofthumb is somewhere between 50% and 75% of yourcurrent income and is based on spending habits andhow much you make. For instance, if Dr. Smith is currentlymaking $180,000 annually pretax, and anticipatesthat he will require 75% of his current incomeat retirement, then in today's dollars, he will require$135,000 annually. This number has tobe adjusted for inflation in future years.

Investment Process

So how should the financial planner utilize theabove information as it pertains to making investmentrecommendations? The best way to answer this wouldbe by way of an illustration.

Dr. and Mrs. Schlossberg have just both turned age50. This year, Dr. Schlossberg will make $180,000.Thus far, among all of their financial assets earmarkedfor retirement, they have accumulated in IRAs and hisemployer's 403(b) retirement plans approximately$728,000. Dr. Schlossberg will make a contribution tohis 403(b) of $16,000 at the end of this year. Since theyhave been somewhat risk-averse and spooked by thecurrent investment climate, their investments are indiversified fixed-income mutual funds offered in theplan and fixed-income funds within their IRAs. Theseaccounts are expected to return about 5% this year. Dr.and Mrs. Schlossberg would like to retire at age 65 andwill require $100,000 annually in retirement income.Assuming that one of them lives until age 90, will theyhave sufficient assets accumulated within 15 yearsbased on their current savings rate to adequately fundtheir retirement?

Assuming a 3% annual inflation rate and a 5%tax-deferred long-term rate of return on their investments,without factoring in Social Security, Dr. andMrs. Schlossberg will require an additional $1.3 millionin financial assets to meet their retirement goal.To meet this objective without modifying their retirementtime horizon and annual income expectations,they will need to generate a 7% rate of return on theircurrent investment portfolio.

Based on current economic conditions in this lowinterest rate environment, they are going to have to bemore aggressive with their overall investment strategy.They will need to consider a balanced investmentstrategy that will have to consist of both fixed-incomeand equity investments. As such, they need to reviewthe investment options available in their IRAs and403(b) retirement plans and diversify not only amongfixed income, but also small, mid, and large cap, aswell as growth, value, and core equity funds to developa balanced asset allocation strategy.

Therefore, before any investment recommendationsare made by any financial planner regardinginvestment options, take the time to go through theabove exercise to determine whether or not you'regoing to meet your long-range financial objectives andevaluate what investment options are best suited toassist you in obtaining your goals.

Thomas R. Kosky and his partner, Harris L.

Kerker, are principals of the Asset Planning Group

in Miami, Fla, specializing in investment, retirement,

and estate planning. Mr. Kosky teaches corporate

finance in the Saturday Executive and

Health Care Executive MBA Programs at the

University of Miami. He welcomes questions or

comments at 800-953-5508, or visit

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