Retirement Guys: Concerned about outliving your income?Written by Nolan Baker Mark Clair | | firstname.lastname@example.org
One of the biggest concerns a retiree has is outliving their income. In financial terms that is called a longevity risk. It can be hard for a family to figure out how much they will need to have saved up because we never know how long someone will live. No matter how many charts, graphs, and projections one makes, still the question is what if you live to 100 or beyond; will the money last as long as you do? To help address that concern for many retirees we have put together a few answers to common questions retiree’s have about outliving their income.
Are my current accounts invested correctly?
Mark and I have talked for years about what we call the mind shift. Most savers and investors have done a good job saving and building money typically through dollar cost averaging. That means the investor buys a fixed amount of investments each and every pay check or year. That is a great strategy for saving and accumulating money, but the mind shift needs to occur when a person gets close to or in retirement time. Taking money out each and every “pay check” or year in retirement isn’t as easy as putting it in. One reason why retirement is different is a major down turn in the stock and bond market could force a retiree to sell off investments at a loss. Instead, we recommend retiree’s split up their savings in different time frames, short term money for the next 5 years, an account for years 6 through 10, and long term investing. Investors who are close to or in retirement time that have the same investment strategy as 10 or 15 years ago, now is a good time to consider updating the plan.
Will my current income last forever?
Many financial professionals refer to retirement income sources as a three legged stool, social security, employer pensions, and investments. Although, both the social security and several employer pension plans are in poor financial health, we consider these two sources of income reliable income for a current retiree when counting up lifetime income. The variable source of income is the investments. The traditional approach has been to put together an asset allocation model that is based upon age and risk tolerance. That model then gives the recommended allocation between stocks and bonds and an expected rate of return. The problem we see with this traditional approach is the stock and bond market in the short term are much less predictable. For example, if the analysis says an investor should earn a 7.25% return, it would be dangerous in our opinion to count that as income forever. Instead what we recommend is looking at the retirement savings in a new way. Instead of focusing on the total return expectation, retiree’s should focus on the income the investments generate. This income, dividends and interest, is much more predictable. If you don’t know that amount of income your current investments are generating, we would recommend that an analysis is completed.
Can I afford another market downturn?
Let’s face it; almost nobody likes it when the stock market goes down. But the reality is, it is a normal part of investing and it will happen time and time again. The question is how can an investor be prepared for it and more importantly what will be the response you take when a downturn occurs? Knowing the plan before the downturn happens can turn this risk into an opportunity for some investors. Earlier we talked about having money in different accounts for different time frames. If a retiree has money to live off for several years that has little to no effect on a downturn in the stock market, then the daily, monthly, or quarterly returns of the market become less important. One thing an investor may not know when it comes to investing into stocks and other equity strategies is an account owner has the ability to set up a predetermined exit strategy, or “circuit breaker,” on their account to try and avoid major downturns in the market. This predetermined investment plan can also be used to determine when to buy back into equities to try and capture opportunities. Short term it is very difficult to predict the markets, but when things technically turn negative will your current plan just ride it out, or is there a predetermined plan in place?
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550