By Jeff Voudrie
Many retirees are coming to the realization that the assumptions they were given on how long their money will last were wrong. Now, they are faced with making tough choices in order to increase the chances they will outlive their money. (See The Coming Retiree Crisis)
The scope of the Great Retiree Crisis is actually larger than expressed in that article because life expectancies have grown significantly the last 20-30 years. Poorly designed financial plans are considered ‘successful’ if they show you having money left based on the IRS life-expectancy tables. Those tables can be outdated compared to current life insurance mortality tables. For instance, typical plans for someone retiring at age 60 were based on a 20-25 year life expectancy.
A retirement income plan that was based upon the assumption that a 75% stock/ 25% bond allocation would average over 9% a year gave many a false sense of security because it showed that they wouldn’t have to worry about running out of money—based on the 20-25 year life expectancy.
Financial planners had reams of academic studies and colorful charts to illustrate why you should be able to earn over 9% a year your entire retired life. “Over the last 100 years…” and “If you just put your money into the stock market and leave it alone you are virtually guaranteed to earn a ginormous return because that’s what happened in 90% of the 10-year periods since 1980.”
Do you realize that if you are married and aged 60 today that there is a 50% chance that one of you will live to age 92? And there is a 25% chance one of you will live to age 96! Those percentages are so high that it is only prudent that your retirement income plan should be based on the expectation that one of you will live well into your nineties. So a retirement life expectancy of 30-35 years should be used instead of 20-25 years.
Very few of you think that you’ll average over 9% a year now. Couple that with a life expectancy that should be 30-35 years or longer and you can understand why so many are so worried. That life expectancy doesn’t take into account any medical or genetic breakthroughs that could extend it even further.
What steps should you take if you find yourself in this situation? The basic problem is money coming in versus money going out. There’s no magic here. You either have to increase the money coming in (without drawing down your investments more quickly) or you have to reduce the money going out.
In order to meet that goal, here are three areas you should investigate thoroughly: housing, employment and leveraging your retirement savings.
Housing: Many retirees had the expectation of downsizing their homes once they retired. From what I’ve experienced, few have actually done it. A home is one of the largest assets you own. If your home is paid for, then selling it and moving to a smaller one will free up that money to generate more income. If you have a mortgage, downsizing will either allow you to be mortgage free or reduce the monthly mortgage payment. A smaller home will also reduce your maintenance costs, heating and cooling costs, property taxes, etc. Some might even consider renting instead of owning.
Employment: If you are nearing retirement, consider working your current job a few extra years. Nowadays, more and more people transition to a part-time position instead of retiring completely. Or you might consider a second career after you retire from your main occupation. If you are already retired, consider going back to work, perhaps doing consulting based on your years of experience. What do you enjoy doing? Is there a way to earn an income from it? Working even part time can extend the life of a retirement income plan significantly. And keep in mind that the less income you need from your investments, the less risk you have to take.
Leverage your retirement savings: Unless you have the luxury of having more money than you can spend, you need to make sure that your retirement savings are working hard for you. Typically, retirees think that they should invest more conservatively once they retire. If you are in danger of running out of money before your life expectancy, then becoming more conservative may actually result in you running out of money sooner because your overall return may be less. I’m not saying that you should take a lot of risk. Instead, the way the money is managed needs to be changed. You need to get as much juice as possible out of the orange. Traditional approaches by the typical Wall Street System advisor involve too much risk and an unlikely to provide the returns you need in today’s low interest rate environment. Nor is it likely that today’s annuities will be the total solution. (To find out more check out my book “How Successful Investor’s Tripled The S&P 500” on Amazon.)
Today’s retirees face a reality far different than the generation before them, but a successful retirement is still possible. Realistic expectations combined with careful planning and focused strategic portfolio management is crucial if you want to survive and thrive in your ‘golden’ years.
Common Sense Advisors does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice. Learn more about our firm at www.commonsenseadvisors.com
Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.