What DO We Know?
In a recent talk, Morningstar’s Christine Benz warned her audience the correct withdrawal rate of their retirement assets would only be “apparent in the rearview mirror.” That’s a scary proposition. But, what do we know for sure about retirement planning?
In 1910 the average lifespan of an American male was 49 years. A little over 100 years later that has increased to 78 years. Further, there was no real retirement for most Americans in the early 20th century; most people worked until they died. Conversely, the length of today’s average retirement is 18 years. Plus, the odds are better than 30 percent that one member of a 65-year-old couple will live to age 95. These numbers make it pretty obvious: if you are closing in or in retirement, plan on needing income for better the part of a decade, and, more likely, for the better part of 20 years.
Longer life means you need to protect against “longevity risk.” That means taking some simple, but often painful steps to be sure you will have enough money to sustain your lifestyle for the rest of your life (lives). I will explain more in this article, but the steps include maximizing your Social Security benefits, maintaining a conservative withdrawal rate, and, exposing a healthy amount of your retirement savings to stock markets.
Books have been written on getting the most from Social Security. And if you are married there is even more significant complexity. The critical component is that you receive an 8% percent increase in your benefit for each year you wait up to age 70. Sadly, about 40 percent of Americans take their benefits at the earliest date possible, age 62, locking in a retirement benefit that is 34 percent less than they would have received at age 70. Couples, as I mentioned, have even more options. My best suggestion would be to either get help from a fiduciary financial adviser, or, as you get closer to retirement, going to a nearby Social Security Administration office (you’ll need an appointment). Professional help or not, for most of us it makes sense to wait to take our Social Security benefit.
Probably the most common question I get is “how much can I take out of my retirement assets and not run out of money.” I wish there were a simple answer. Perhaps you have heard of the “4% percent rule?” That is, you can take 4% a year out of your savings without running out of money. Sadly, that is not always the case. There are considerable variances, much of it due to when you retire. If you quit working (and lived on your portfolio) during the raging bull markets of the 1980s and 1990s, you did fine. If you started a withdrawal strategy in 2001, or 2008, it looks vastly different — your assets would have declined while you were drawing on them. You will likely need an independent professional to help you determine a withdrawal strategy, but strongly consider using a conservative withdrawal rate in the early years of retirement.
Low-interest rates are lovely for those borrowing money, but hard on people who hope to live on the interest provided by fixed income investments. Federal Reserve policy means low ‘yields” or interest rates will likely to continue. Therefore, living off of interest from
“safe” bonds is pretty much impossible. While it may be tempting, please do not substitute high yield, emerging market or any of the potentially disastrous bank loan "bonds" as a way to increase income. These risky securities have the potential to suffer massive losses. The days of buying bonds or bond funds to finance your retirement are gone (at least for now).
So, if low interest rate bonds won’t give you the growth or income needed to finance your retirement where do you turn? Global stock markets are the best answer I know of. Today’s reality is that you will likely need to expose somewhere around half of your money to stocks. These stocks, and we suggest a portfolio that holds more than 10,000 of them, have produced income (dividends) and capital return (stock market gains)for a very long time. The challenge you face is that stock markets are volatile, and, from time to time, your portfolio will decline in value. That’s uncomfortable when you are living off your savings. The only reassurance I can give is that while stock prices fluctuate, they have provided long-term growth for investors.
Just when you thought the bad news was over, I can happily add to your list of concerns. Inflation, while low, is not gone. One of the biggest mistakes I see is people running retirement calculations and using the inflation rate of 1.4% which is what we have had the last ten years. Our planners use either actual historical data, or 3%, which has been the long-term inflation rate going back to the 1930s. Inflation is a critical component of any retirement calculation, as rising inflation tends to have a more significant impact on older adults. Any retirement portfolio should hedge against inflation risk using stocks as well as TIPS (Treasury Inflation Protected Securities).
Retirement planning is almost always complicated and most of us need professional help to get it right. You must realize you will not have the benefit of the rearview mirror. Prepare for a longer life, deal with longevity risk, and create a robust financial plan that will provide for more than just sustenance.