There are millions of words written every day about the economy, the direction of the financial markets, investment advice, and so on, yet no other topic gets as much attention as the concept of “retirement”. When you think about it, it should get attention.
Investors spend their entire working career saving and planning for this phase in life. While we prefer the phrase, “making work a choice” (no one likes thinking about reaching the end of their usefulness) we know many people struggle to understand key issues of retirement. So today we want to cover three main areas.
Did you plan?
First, you need to determine if you have accumulated enough capital during your working career to sustain over a 30 year or more time horizon. Either you are planning for this, or you are not. If you are not, you had better get a plan. Some surveys of Americans indicate about 80% of the population does not even have a plan nor financial goals. (Nick Murray)
Failing to plan is planning to fail.
Estimating your income needs over a 30 or 40 year period is a challenge, which is why we invest in research and tools to help plan for the impact of inflation, healthcare expenses, and uncertainty needs. There are simply too many variables involved to rely on back-of-a-napkin math, rules of thumb or ballpark estimates.
Clearly this is one of the most important services we provide to clients. Far more valuable than forecasting the economy, or trying to be tactical and guess which investments may or may not outperform in the next 6-12 months. Anyone can play a stock market “guessing game”; professionals can help you work toward making sure your plan is solid and accommodating of whatever challenges you may face.
How long are you planning to live?
Second, you need to consider your longevity and longevity of your money. In today’s world, life expectancy for a non-smoking couple who retire at age 62 is over 30 years. On average at least one of the two individuals will live to be 92. That’s just on average! (Nick Murray)
With healthcare extending life expectancies, there’s a good chance you will live longer than you anticipate. I have clients tell me about water polo tournaments at their independent living communities. Picture that!
Retirees can expect to live many more years than the generations of yesteryear. This means your retirement savings will need to last longer than previous generations.
Financially, there are really only two outcomes. Either your money out-lasts you, or you live beyond the lifetime of your money. For those water polo players, the ones intent on enjoying a full and active lifestyle, the degree of certainty that their capital and income will outlast them has to be a priority.
The alternative is to watch as people consume their income, then deplete their capital, and still have several good years ahead of them.
It is essential to realistically consider these two outcomes. Taking the time to understand the potential consequences of your actions today could have a large influence on the outcome tomorrow. Make smart choices while you still can. It is really all about Investor Behavior.
Does your plan account for inflation?
The third principle accounts for the problem of inflation on a portfolio. Over a 30-40 period, the impact of inflation on purchasing power could make a substantial difference on retiree’s lives.
Nearly every year inflation, or the cost of goods and services, has risen. On average, the Consumer Price Index (CPI) has been compounding at around 3% per year over the last century. I doubt that will change significantly any time soon. That means you could see your living costs rise 2.5 times during your retirement period.
Let that number soak in.
Investments that do not increase their income, either from interest or dividends at a rate at least equivalent to the inflation rate, result in less purchasing power in the future. This is why fixed income can be risky for retirement cash flow. Fixed income means the income is fixed – it does not rise.
Equity investments, or stocks, especially those who pay rising dividends are different from any other investment class. Stocks are the only one that captures human ingenuity, which I believe is the ultimate asset. Human ingenuity remains one of the most under-stated, under-rated reasons for the stock market’s potential growth over time. However, stock investing involves risk including potential loss of principal.
I believe ingenuity is an unfair advantage, and I want unfair advantages, especially for clients.
Conversely, I strongly believe a fixed income strategy may not sustain retirees through a 30-40 year retirement when accounting for the rising cost of living.
It is essential to consider these three principles, but especially number three. Careful planning can shed light on the likelihood of exhausting your money or out-living your resources.
If you would like to have a conversation about these principles or discuss our investment philosophy and strategies, we welcome the opportunity. Likewise, if you know of someone who does not have clarity and confidence about their retirement, feel free to forward this article with them.
We love helping clients have clarity and confidence about their resources, and great capability in their future. That is our “Why” – It is who we are.
Thank you for being a client of Prosperion Financial Advisors.
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