Cherish Model Portfolio: A Comprehensive Guide to Retirement Planning
Understanding the CHERISH Model
The CHERISH model is a retirement planning framework developed by Wade Pfau, a professor of retirement income at The American College of Financial Services. It stands for:
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Conservatism
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Health
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Expenses
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Return
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Income
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Sequence
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Healthcare
The CHERISH model provides a structured approach to retirement planning by addressing key factors that can impact your financial security during retirement.
Conservatism
Pfau emphasizes the importance of conservatism in retirement planning. He recommends adopting a withdrawal rate that is lower than the historical average return on stocks. This is because the market can experience periods of volatility, and you don't want to run out of money during a downturn.
Health
Your health can significantly impact your retirement. If you develop a chronic illness or need long-term care, your expenses can increase significantly. It's essential to have adequate insurance and savings to cover these potential costs.
Expenses
Understanding your expenses is crucial for retirement planning. You need to know how much you will need to cover basic necessities such as housing, food, and healthcare, as well as discretionary expenses like travel and entertainment.
Return
The return on your investments will play a significant role in determining your retirement income. Pfau recommends diversifying your portfolio and investing in a mix of stocks, bonds, and real estate to maximize potential returns while minimizing risk.
Income
Income is another important consideration for retirement planning. You may have sources of income such as Social Security, pensions, or annuities. It's essential to estimate your future income and ensure that it will be sufficient to cover your expenses.
Sequence
The sequence of market returns can significantly impact your retirement savings. If you experience a market downturn early in retirement, it can have a devastating effect on your portfolio. Pfau recommends using a bucket approach to manage the sequence risk by allocating a portion of your portfolio to short-term investments that can be used to cover expenses during market downturns.
Healthcare
Healthcare costs are a major concern for retirees. According to the National Bureau of Economic Research, the median couple retiring at age 65 can expect to spend over $300,000 on healthcare expenses during their retirement. It's essential to have a plan to cover these costs, such as through Medicare, supplemental insurance, or long-term care insurance.
Tips and Tricks for Using the CHERISH Model
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Start planning early: The sooner you start planning for retirement, the more time you have to save and invest.
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Set realistic goals: Don't overestimate your future income or underestimate your expenses.
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Diversify your portfolio: Invest in a mix of asset classes to minimize risk.
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Consider annuities: Annuities can provide a guaranteed stream of income during retirement.
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Use a retirement calculator: A retirement calculator can help you estimate your future income and expenses, and determine how much you need to save for retirement.
Pros and Cons of the CHERISH Model
Pros:
- Comprehensive and systematic approach to retirement planning
- Emphasizes the importance of conservatism and healthcare planning
- Provides a framework for managing risk and uncertainty
Cons:
- Can be complex for individuals who are not financially savvy
- May not be appropriate for all situations
Call to Action
Retirement planning is essential for ensuring your financial security in your later years. The CHERISH model provides a valuable framework for addressing key factors that can impact your retirement. By following the principles of the CHERISH model and seeking professional advice when needed, you can increase your chances of a successful retirement.
Additional Resources
Tables
Table 1: Healthcare Costs
| Age |
Annual Healthcare Costs |
| 65 |
$6,000 |
| 75 |
$12,000 |
| 85 |
$18,000 |
Source: National Bureau of Economic Research
Table 2: CHERISH Model Factors
| Factor |
Description |
| Conservatism |
Adopting a withdrawal rate that is lower than the historical average return on stocks |
| Health |
Considering the potential impact of health costs on retirement expenses |
| Expenses |
Understanding your essential and discretionary expenses |
| Return |
Diversifying your portfolio to maximize returns while minimizing risk |
| Income |
Estimating your future income from sources such as Social Security and pensions |
| Sequence |
Managing the sequence of market returns to minimize risk |
| Healthcare |
Planning for the high healthcare costs that may arise during retirement |
Table 3: Pros and Cons of the CHERISH Model
| Characteristic |
Description |
| Pros |
Comprehensive, emphasizes conservatism and healthcare planning, provides a framework for managing risk |
| Cons |
Complex, may not be appropriate for all situations |
