Five reasons why you should work with us to create a retirement plan.
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The last two decades has been devastating for savers, especially retirees.
A Wall Street Journal article noted that retirees continue to get squeezed and are concerned about making their savings last. While the Dow Jones Industrial Average (DJIA) index has tripled since the trough of the financial crisis, the average one-year CD has not paid more than 1 percent since 2009.
The DJIA stood at 26,405 (as of 1/25/2018), a more than 20 percent increase since the 2016 election, and the value of the digital currency. As a result of a strong stock market performance, stocks may have become an outsized portion of investors’ portfolios, thereby necessitating some rebalancing.
This means that investors who have benefited from the stock markets rise may find themselves taking more risk than they realize.
If you are concerned about stock market risk, call us.
The Center for Retirement Research (CRR) at Boston College, found that 52 percent of working-age U.S. households are at risk of being unable to maintain their standard of living in retirement. Many recognize the possibility of a shortfall but 19 percent do not. Contributing factors include increased life expectancy, declining Social Security income replacement, and the shift from pensions to defined contribution savings plans. Older Americans are entering retirement carrying more debt. According to a paper by the Retirement Research Center at the University of Michigan, more Americans between ages 56 to 61 are carrying more debt than any time in recent history. Another retirement problem receiving increasing attention is the social isolation of retirees, which has been deemed a risk equal to or greater than major health problems such as obesity.
Studies about retirement savings plan contributions indicate a lack of participation by many American workers. A study by the PEW Charitable Trusts found that 25 percent of millennial adults participate in employer-sponsored defined contribution retirement plans versus 40 percent of Generation X and 43 percent of baby boomers. Stated another way, a large majority of millennials have no retirement savings plan.
If you are concerned about having the money to retire, call us.
First, the good news. According to a leading investment firm, current retirees are doing just fine. They studied a large group of retirees. They’re doing very well. The group that retired about 20 years ago have about 80% of their retirement savings intact. In fact, one-third of these retirees have more money than when they retired.
But here’s the bad news. These retirees are different from those retiring today or those just beginning their careers. Their experiences are different and so are their resources.
If you have been retired for 20 years that makes you about 85 years old. These older retirees grew up during the “Great Depression” and that had a lifelong impact on them. Their experience made them lifelong savers. Many also worked for companies that provided their employees defined benefit pension plans.
This means is that many of these pensioners have two sources of income: a company pension and social security. Living within their means, they were able to leave their personal retirement assets untouched.
Some of the more affluent may have bought vacation homes which have appreciated in value. Others have begun gifting to their children and grandchildren.
We can’t infer from their success that newer retirees will do nearly as well. There are several reasons why. Except for government employees, few private sector employees have defined benefit pension plans. Social Security is under pressure and will simply not have enough in the Trust Fund to continue to pay retirees at the same rate as current retirees. Medicare is also running large deficits which will result in higher medical expenses for the elderly.
New and future retirees will not have private pensions, face lower social security income and higher medical expenses. Only saving and investing wisely will save them.
For more information contact us.
This was a question asked by a visitor to Investopedia.
Several other advisors responded. Here’s my contribution to the discussion.
You have gotten some good advice from the others who have responded. The only advice I would add to theirs is that the years just prior to retirement and the first few years of retirement are the most critical years for you. These are the years when significant investment losses have the biggest impact on your retirement assets.
That’s because of something referred to as “sequence of returns.” “Sequence of returns” refers to the fact that market returns are never the same from year to year. For example, here are the returns for the S&P 500 from 2000 to 2010. That was a dangerous decade for retirees.
2000 -9.1% 2001 -11.9% 2002 -22.1% 2003 28.7% 2004 10.9% 2005 4.9% 2006 15.8% 2007 5.5% 2008 -37.0% 2009 26.5% 2010 15.1%
When you are accumulating assets, the sequence of returns has no impact on the amount of money you end up with. But when you are taking money out, the sequence becomes very important. That’s because taking money out of an account exaggerates the effect of a market decline.
If you retired in the year 2000 with $100,000 and took out 4% ($4000) to live on each year, by 2010 your account would have shrunk to about $66,200 and, if you continued to withdraw the same amount each year you would now be taking out 6%. If you have another 30 years in retirement, that rate of withdrawal may not be sustainable.
For that reason, most financial advisors recommend creating a portfolio that can cushion the effect of poor market performance near your retirement date.
NFL football player Marion Henry retired from football at age 28. Professional athletes usually begin a second career after they give up the game, most because they have to. Here’s his admission:
Eighty percent of retired NFL players go broke in their first three years out of the league, according to Sports Illustrated.
I was one of them.
Out of football and money at age 28, I saw the financial woes of big-money ballplayers as symptomatic of a larger problem plaguing average Americans – a retirement problem. Experts say many people are inadequately prepared or poorly advised when it comes to retirement planning. As a result, they outlive their funds.
He goes on to make the point that:
When I played football, we practiced against the worst-case scenario that we could face on game day. Many Americans are not planning for those worst-case scenarios in the fourth quarter of their lives, and some who believe they are prepared may have a false sense of security.
People often have a false sense of security because they have not really priced out all the expenses that they will incur during retirement, or considered the effects of inflation on the cost of living as they get older. They also assume that their investments will continue to grow at the same rate as they have in the past. And few retirees really plan for how they will pay for long-term care if they should develop serious long-term illnesses not covered by Medicare.
A good retirement planning program will take these issues into consideration. Visit an dependent RIA who will prepare a retirement plan for you and take the guesswork out of retirement.
Forgive me for stating the obvious but in my experience, it is precisely those things that are most important to restate. People need to hear what is obvious…until they finally get it.
One obvious point is that keeping physically active and mentally engaged preserves one’s health and saves money. Obvious? Sure. Yet people don’t follow this advice, though they are far more apt to do so when they internalize what the cost of health care is. The average person spends $275,000 on health care expenses in retirement. So an investment in good health can play a huge role in making one’s retirement numbers work out.
A second “obvious” is the benefit of setting up multiple streams of income. If you have income from multiple sources that don’t fluctuate because of moves in the market your retirement is much safer than if you are totally dependent on your portfolio to support you. What are those income sources? Social Security is one source for almost everybody. So are pensions. Another source can be annuities. If you can get two, three or even more paychecks every month you worry less about the market going up or down.
Third, saving 15% of your pay, applying the 4% rule and steering clear of the “retirement risk zone” that spans the five to ten years before and after retirement makes so much sense that it’s obvious. But how many people actually follow this obvious advice?
Finally, having a plan prepared by a competent advisor who specializes in retirement planning is an obvious way of tying these points together. A plan can take the cost of health care into account and see how the risk of a serious illness can be mitigated. It can define the income streams you need in order to meet your basic needs and your “wish list.” And it can determine the amount of risk you are taking to meet your retirement goals and warn you about taking too much risk.
I will retire in the Spring of 2018 (by then I will have turned 65). My wife is a teacher and will retire in June of 2018. When we chose 2018 as our retirement date, we paid off our house. At the same time we replaced one of our older cars with a new one and paid cash. We have no debt. We will begin drawing down on our investments shortly after my wife retires. Also we both plan to wait until we are 66 to draw on Social Security. Our current nest egg is divided 50/50 in retirement accounts and regular brokerage accounts. About 60% are in equities and mutual funds. The rest is in bonds and cash. I’ve read about the 4% rule, adjusting annually up depending on inflation, expenses and market performance. As of today, based on our retirement budget, we can generate enough cash only using our dividends to live on. In our case this approach would have us taking interest and dividends from all accounts, including IRA, 457 B and 403 B before we are 70 years old. Seems that this approach would make it easier to deal with market volatility, yet it does not seem to be favored by the experts.
There are a number of different strategies for generating retirement income. The 4% rule is based on a study by Bill Bengen in 1994. He was a young financial planner who wanted to determine – using historical data – the rate at which a retiree could withdraw money in retirement and have it last for 30 years. The rule has been widely adopted and also widely criticized. It’s a rule of thumb, not a law of nature and there are concerns that times have changed.
Based on your question you have determined that the dividends from your investments have generated the kind of income you need to live on in retirement. Like the 4% rule, there is no guarantee that the dividends your portfolio produces in the future will be the same as they have in the past. Dividends change. Prior to the market melt-down in 2008 some of the highest dividend paying stocks were banks. During the crash, the banks that survived slashed their dividends. Those that depended on this income had to put off retirement because their retirement income disappeared.
I would suggest that this is an ideal time to consult a certified financial planner who will prepare a retirement plan for you. A comprehensive plan should include your income sources, such as pensions and social security. The expense side should include your basic living expenses in addition to things you would like to do. This includes the cost of new cars, travel and entertainment, home repair and improvement, provisions for medical expenses, and all the other things you want to do in retirement. It will also show you the effects of inflation on your expenses, something that shocks many people who are not aware of the effects of inflation over a 30-year retirement span.
Most sophisticated financial planning programs forecast the chances of meeting your goals based on a “total return” assumption for your investments. Of course, the assumptions of total return are not guaranteed. Many plans include a “Monte Carlo” analysis which takes sequence of returns into consideration.
That’s why the advice of a financial advisor who specializes in retirement may be the most important decision you will make. An advisor who is a fiduciary (like an RIA) will monitor your income, expenses and your investments on a regular basis and recommend changes that give you the best chance of living well in retirement.
Finally, tax considerations enter into your decision. Most retirees prefer to leave their tax sheltered accounts alone until they are required to begin taking distributions at age 70 ½. Doing this reduces their taxable income and their tax bill.
I hope this helps.
If you have questions about retirement, give us a call.
Question from middle-aged worker to Investopedia:
I am 58 years old earning $100,000 per year and have investments in multiple retirement accounts totaling $686,250. I’m retiring at the age of 65. I am currently investing $16,000 per year in my accounts. I project to have $848,819 in my retirement accounts at the age of 65. I will be collecting $2,200 in Social Security when I retire. I also do not own my home due to my divorce. How much money will I need to hit my projection? Should I be saving more?
My answer:
I believe that you may be asking the wrong question. For most people, a retirement goal is the ability to live in a certain lifestyle. To afford a nice place to live, travel; buy a new car from time to time, etc. By viewing retirement goals from that perspective you can “back into” the amount of money you need to have at retirement.
To do that correctly you need a retirement plan that takes all those factors into consideration. At age 65 you probably have 20 to 30 years of retirement ahead of you. During that time inflation will affect the amount of income it takes to maintain your lifestyle. You will also have to estimate the return on your investment assets. As you can see, there are lots of moving parts in your decision making process. You need the guidance of an experienced financial planner who has access to a sophisticated financial planning program. Check out his or her credentials and ask if, at the end of the process, you will get just a written plan or have access to the program so that you can play “what if” and see if there are any hidden surprises in your future.
With over 100 million people in America closing in on retirement, big questions arise. Most investment advisors are oriented toward providing advice on how to build assets, but lack the tools and experience to advise their clients about how to live well during decades of retirement.
The most common advice that retirees get involves invoking the “4% Rule.” That number is based on a 60-year-old-study that may well be out of date. Individuals and families should be getting better guidance because now retirement often spans decades. Many people are retiring earlier and living longer.
There are many critical decisions that must be made before people leave their jobs and live on their savings and a fixed income.
Some Registered Investment Firms (RIAs) have the sophisticated financial planning tools to answer these questions. They are often CFPs® and focus on retirement planning. Once a plan is prepared, these same RIAs, acting as fiduciaries, are often asked to help their clients manage their assets to meet their retirement income goals.
If you are approaching retirement and have questions or concerns, contact us. We’ll be glad to provide you with the answers.
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