Careful and thorough planning can create greater understanding of investment trade-offs, which generally leads to better life decisions. In this hypothetical case study based on client experiences, a 45-year-old partner at a top consulting firm came to us for help with determining if she was on track for a secure retirement, and if she could downshift to a less stressful, but less lucrative, job.
Carla earned $500,000 in annual salary and, on average, another $500,000 in annual bonus. The primary breadwinner for her family, she had paid off her student loans and was living off her after-tax salary. She had begun to save about $250,000 annually (roughly the value of her bonus after taxes). In just a few years she had amassed a $1 million portfolio, which was conservatively invested, with 30% in stocks and 70% in bonds.
Although Carla was a highly motivated, successful professional, she did not feel comfortable about her financial future, and her lack of a clear plan made her anxious.
We reminded Carla that she still had a huge asset in her future earnings power, or human capital, and that she was building her financial capital at a good clip.
Was it building fast enough to meet her goals? Unfortunately, no—not if she wanted to maintain her spending rate, move to a lower-paying job, and retire not long past her 65th birthday.
Using Bernstein’s proprietary Wealth Forecasting System, we estimated that if Carla changed jobs in 10 years, she’d need to delay retirement significantly. If she wanted her plan to succeed even if future markets were poor (always a good idea), maintain her conservative asset mix, and spend an inflation-adjusted $200,000 in retirement, we estimated that she would need to work past age 75, as the dark green area in the Display below shows.
This was not a prospect that Carla found appealing.
Fortunately, our analysis also revealed that Carla had a host of levers to pull that could help her reach her desired outcome. She could increase her savings rate while she was working, delay retirement, reduce spending in retirement, adjust her asset allocation, and delay (or give up) her job change. For example, we estimated that Carla could retire by 66 if she:
- Maintained her savings rate but put off changing jobs for 15 years and increased the risk level of her portfolio while she was working (the two light blue squares in the display’s second column from left);
- Upped her savings to $350,000 a year, switched jobs after 10 years, and increased the risk level of her portfolio while she was working (the two light blue squares in the display’s third column from left); or
- Maintained her savings rate and her conservative asset mix but stayed in her current job (the light blue square in the righthand column of the display).
Carla could retire even earlier, we estimated, if she stayed in her current job, maintained her savings rate, and moved to a growth-oriented portfolio while she was working (the two darker blue squares in the display).
Carla had some thinking to do, but she was pleasantly surprised that she had several options to meet her goals. And she felt empowered by the idea that she controlled the key levers of her future financial outcomes.
The Bernstein Wealth Forecasting System uses a Monte Carlo model that simulates 10,000 plausible paths of return for each asset class and inflation and produces a probability distribution of outcomes. The model does not draw randomly from a set of historical returns to produce estimates for the future. Instead, the forecasts (1) are based on the building blocks of asset returns, such as inflation, yields, yield spreads, stock earnings and price multiples; (2) incorporate the linkages that exist among the returns of various asset classes; (3) take into account current market conditions at the beginning of the analysis; and (4) factor in a reasonable degree of randomness and unpredictability