It is far too easy to fall under the spell of seeing exactly what we want to see and enter into Voodoo Retirement Planning. Especially if we are short of generally accepted retirement savings goals and really want to retire or stay retired. Voodoo Retirement Planning is any retirement planning strategy perceived as being unrealistic and ill-advised. OK, I am taking the definition of Voodoo Economics and applying it to retirement planning. I just like the sound of it and who can resist saying or writing the word Voodoo.

As I posted earlier I am in early retirement and I have paid my financial planner. Paid him to create my ongoing retirement plan. I should get the results in a couple of weeks. I could research and lay out something myself and believe me I do all the time. But I decided to pay for professional advice because it is far too easy for me or anyone to enter into Voodoo Retirement Planning.

Please let me explain.

With Voodoo Retirement Planning there will be just enough factual truths to make people miss the dangers. There is no magical voodoo retirement plan that can safely allow anyone to retire on insufficient funds for a lifestyle that will cost more than the acceptable withdrawal rate. There is a lot of information available from all kinds of sources. How that information is presented and how we accept it plays into how far we go into uncharted or ill-advised strategies to make things work for us.

That “acceptable withdrawal rate” also adds to the allure of the Voodoo Retirement Planning spell. Experts can’t even agree what that safe withdrawal rate is. Most say it is 4% with yearly inflation adjustments. While others claim it should be 3%. Then there is the argument that by foregoing yearly inflationary increases it can easily be up to 5%. The latest is that it can’t be a “set it and go” withdrawal rate. It must be adjusted each year based on portfolio performance. Any confusion in acceptable retirement planning practices can be used to add legitimacy to a Voodoo Retirement Plan.

The Signs of Voodoo Retirement Planning

First off. If we have enough financial knowledge and we find that our gut feeling is it is too good to be true. Then it probably is. We must activate our skepticism and tread carefully. Go in with open eyes, not blindly in a zombie trance toward an easy meal. That said there can be just enough truths to a Voodoo Retirement Plan to lure anyone in.

Changing Portfolio Return Assumptions to Meet Targeted Needs

Voodoo Retirement Planning starts here and it is backwards to what should be done in a sound retirement plan. Sound plans start with what your portfolio can safely support. Support funding for a long amount of time. Or at least just long enough. If our targeted and needed retirement funding will need a 7% withdrawal rate from our portfolio. Then changing the portfolio investment return assumptions to generate +7% to create our retirement plan is a potion for disaster. It is no more than voodoo magic. Magic giving the false illusion of it being a sound plan. It is a Voodoo Retirement Plan based on wishes instead of sound estimates.

Whether it is a 5% or 10% total portfolio withdrawal rate wanted to get the desired retirement income amount, reality should dictate what the sustainable withdrawal rate and strategy should be. If that reality is not enough. Then we have to adjust our lifestyle cost or contribute more to the portfolio before fully retiring.

Over allocation of high risk investments to hit Voodoo Retirement Plan return assumptions

To get the returns to make taking a high withdrawal rate appear legitimate. Voodoo Retirement Planning will make the case for having too much invested in high risk assets. Asset investment diversity gets overlooked for the case of higher gains. Using long-term trends may make sense when looking at overall market performance for these high risk assets over very long periods of time. However if our retirement falls in a long bad market cycle or cycles. Then those long-term trends mean nothing to us. We or should I say our portfolio is the living dead as far as retirement funding goes. Nobody wants to hear the portfolio cannot support what we need to retire on. So the pitch is the fund can grow itself with a very high risk investment strategy.

Using historical returns to lock-in a strategy and return assumptions

Historical return statistics are great for seeing the past performance. But that doesn’t mean they will repeat in exactly the same fashion during the years we are in retirement. Voodoo Retirement Planning will embrace the stats that support the unrealistic income needs. As an example, look at government bonds. Historically it will come up that they return 5% to 6% a year. But there is no way we can expect that today or even in the near future. Using assumptions like that in our calculations to support a higher withdrawal rate is going to kill a portfolio. The same goes for short history stats for hot new asset classes. Some may sprint within just a few years to a fast start with high growth. However jumping on new asset classes using those figures to make our going forward portfolio return assumptions is a crazy-scary plan.

In Closing

We need to create a sound retirement plan while living with unreliable financial return assumptions. To do that we should run multiple diversified asset classes with reasonable return scenarios through our calculations to understand all the different possible outcomes to our retirement plan.

By doing this we can test our plan to give us a higher feeling of plan confidence. We can gauge what our retirement funding risk really is. It also allows us to create worst case contingency plans to counter bad portfolio return cycles that may/will come up.

I also feel that for some people there is a huge benefit, myself included, in having a second set of eyes. Eyes belonging to someone professionally trained in financial planning. With a trained brain to recommend the best retirement plan. In my case it will add a lot a comfort in knowing that we aren’t under the spell of some bad Voodoo Retirement Planning assumptions.

Voodoo Retirement Planning can be very tempting. It is nothing more than telling us exactly what we want to hear. Not based on sound, fully factual, or sensible assumptions.

Have you ever been tempted by a too good to be true voodoo retirement plan?