Monday, December 28, 2009

A Career Planning Approach

An approach to career planning

An Approach to Career Planning

Developing a career plan can be a good way to get comfortable with the personal strategic planning process. For one thing, many people already have a clear picture of their "dream" job (the job they would like to have 5-10 years from now) -- so, the first step in the planning process has already been completed. For another, many people will find that some very useful work has already been done for them!

The approach presented here builds upon the process summarized in this overview of personal strategic planning.  The primary steps in the process are covered in more detail in:
If you are not familiar with this process, I suggest you review the above posts before developing your career plan.

What are the Requirements? A Useful Intermediate Step

Here's a useful step not included in the basic personal strategic planning process.  After you have decided on your dream job, but before you start brainstorming your SWOTs, take the time to

Tuesday, December 15, 2009

Don't Plan Retirement Assuming Average Stock Market Returns

Planning Your Retirement Assuming Average Stock Market Returns is Risky

In a recent post I warned that developing your retirement plan based solely upon the advertised average stock market returns may be hazardous to your financial health. When using a traditional retirement planning calculator, I consider not only the average but also the range of past outcomes, and the distribution/variability of returns between the best and worst outcomes.

Note: If you find the chart below difficult to digest, see the presentation in this post first.

Historical Results of Investing in the Stock Market for 20 Years

Graph of stock market (Dow) return variability: percentiles (probability))
Retirement Savings: Distribution of 20-Year Returns

In the chart above (click on it to expand), we revisit the situation introduced in the previous post -- you receive a $100,000 inheritance at age 45 and plan to retire at age 65. (Note: to calculate results of a $10,000 inheritance, divide by 10.) The point of the chart is to give you a better feel for your potential results based upon the historical results in my database of DJIA (Dow Jones Industrial Average) stock market returns over the past 100 years or so. The interpretation of the "lines" is as follows:

Wednesday, December 2, 2009

Implications of Stock Market Dollar Returns on Retirement Planning

Counting on Average Market Returns May be Hazardous to Your Health

Does your retirement plan assume you will earn average returns on your stock market investments? Are you assuming that because over the long run market returns don't seem to vary much from the average you are safe counting on average returns? If you assume average returns, you are going to be disappointed much of the time -- possibly dangerously disappointed. The average is a good place to start your analysis. However, in this post I hope to convince you that it's not a good place to stop.

In a post in May, we saw that for a theoretical buy and hold investor, the longer the holding period the closer the annual return converged on the long-term average stock market return of around 10% per year. However, in a recent post we saw that while the annualized percentage returns converge with time, stock market dollar returns diverge with time. In this post we'll take a first look at the impact this has on retirement planning.

Retirement Savings Assuming "Average" Returns

Average results of investing retirement savings in the stock market
Planned Retirement Savings Assuming Average Returns

In the above graph (click to expand), we assume that you are a 45 year-old planning to retire at age 65, but somehow you haven't gotten around to saving anything yet. You've played around with a handy dandy simple retirement planner such as the retirement spreadsheet I introduced in October, and determined that "your number" is $673,000. That is, given your expected pension and social security income, on your retirement date you will need a $673,000 investment portfolio to supplement your guaranteed income. Further, assume