By Dennis Kagel, Chartered Financial Consultant
Health care costs continue to rise and be a main concern for individuals near and in retirement. Americans are living longer today than ever before. Have you ever wondered what would happen if your money died before you did? I realize that’s a different way to phrase the challenge that many retirees face, but it does happen to some people. Recent surveys actually indicate that people fear running out of money in retirement more than they do facing the Grim Reaper (death).
Add in the fact that: fixed interest rates are at historical lows; and, the market will always have volatility as one of its main characteristics; and, most people believe that taxes will go up in the future; and, pensions are going away. The combination of these factors will most likely have a big impact on our financial future.
Running out of money during retirement is directly related to volatility. As volatility goes up, the expected failure rate of a portfolio taxed with making withdrawals rises almost exponentially. Unfortunately most retirees don’t appreciate the link between portfolio volatility and running out of money while still alive, and many don’t even have a good idea of their portfolio’s volatility. Even if a portfolio’s expected average rate of return is comfortably above the withdrawal rate a few random bad years might wipe it out if the volatility is high.
What should we do to manage the risk of running out of money? The number one mistake people make with their money is they stay too heavily invested in risk at too advanced an age. Let’s examine further how keeping one’s money at risk (mutual funds, stocks, etc.) Can negatively impact the quality of life during retirement.
Two Brothers, Two Different Retirements
Steve retires in 1990 and Bill retires in 2000. They each have $500,000 in their retirement account (401k, IRA, etc.) invested in the market and upon retirement they each withdraw $30,000 annually as income. Using the performance of the Dow Jones Industrial Average after 10 years of making withdrawals Steve’s account had over $1,234,328. On the other hand Bill only had $156,081 left in his account!* This illustrates the potential danger of staying invested in risk at too advanced an age. If you keep your money in the market during retirement you are taking a risk.
The one thing you must absolutely do to design a sound financial strategy for retirement — you must take longevity risk off the table!
This is the danger of outliving your money. This means that when you fast-forward to the day you plan to retire you need to evaluate what your income is going to look like. Let’s say you’ll have $1,500 a month from Social Security and you’ll have a Pension for $1,300. Let’s also assume your spouse will have $650 a month from Social Security. This is a joint monthly income of $3,450. Of course, if you do not have a pension the financial picture is changed quite a bit. But let’s assume you have the $3,450 monthly income and your fixed expenses (the ones you definitely have each month) are $3,250 and you add in another $1,200 a month for variable expenses such as dining out, hobbies, etc. You have $4,450 in monthly expenses and only $3,450 in income. You have a shortfall of $1,000 per month. You must somehow build in a financial strategy that will provide you with a guaranteed lifetime income stream of $1,000 per month. Stocks won’t do it, mutual funds won’t do it, bonds won’t do it, and CD’s won’t do it because they don’t know when you are going to die.
A Paycheck for Life
I don’t like losing money! I don’t like volatility! I don’t like risk! And most of our clients who are age 55 and over don’t like risk and losing money either. We use modern investment strategies specifically designed to minimize and control risk and that will provide you that guaranteed monthly income that you need to be able to count on being there and one that you will never outlive. You need to know that if the market goes up, down or sideways, you will be Okay.
For a no-cost and no-obligation visit where we will review your current situation and show you how to build a guaranteed “paycheck for life,” call 309-454-9171 or stop by our offices at 321 Susan Drive, Suite A, in Normal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
*Source: Forecastchart.com – The Dow Jones Industrial Average is an index of 30 large, publicly traded companies based in the U. S.
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