TALK ABOUT RETIREMENT


Planning for retirement should combine an understanding of the challenges investors face with knowledge of how to develop a strategy that balances the need for income and growth against the risks. Here we highlight the top three retirement challenges and offer investment strategies to help your clients reach their retirement goals.

Understanding the Challenges

Making your money last
A challenge we face when planning for retirement is the risk of outliving our money, called "longevity risk." Experts say you’ll need roughly 85% of your current income during your first year of retirement.

Generating reliable income
Social Security was never designed to be the sole provider of income in retirement. In fact, it accounted for just 38% of the average retiree’s income in 2013. At the end of 2014, the average retiree’s monthly Social Security benefit check was just $1,305.

Keeping up with Inflation
Inflation can reduce the "purchasing power" of your savings, even when it is rising at moderate rates. So finding investments that can help offset the damaging effects of inflation can be very important.

Making your money last

The good news is that Americans are living longer. The bad news is that living longer increases the odds of outliving your money. Consider a married couple, each 65 years old, in relatively good health. There is a 50% chance that at least one of these individuals will live to the age of 92 and a half – another 27 years.

It’s also important to keep in health care costs in mind; the average 70-year-old spends nearly $11,000 a year on medical services. So, unexpected health expenses can throw a wrench into even the most well-thoughtout retirement plans.

Keeping up with inflation

Although inflation works against all investors, it hits retirees especially hard because their incomes are typically not rising like they did when they were working. This illustration of the rising cost of a loaf of bread shows just how rapidly prices for consumer goods can rise, even during the periods of modest inflation we have seen in recent years. And when prices rise, the same dollar buys less and less of the same goods and services. For example, consider a retiree who is earning 1% on an investment in a money market fund, and the cost of a loaf of bread is rising 2% each year. It’s easy to see that this investor is losing purchasing power – he or she is not even keeping up with inflation.

Generating reliable income

Another challenge retirees face is how much money to withdraw from their accounts each year, balancing the need for a stream of current income against the danger of outliving their money.

Even the slightest adjustments can make a big difference. For example, if you withdraw $30,000 each year from a $500,000 portfolio (a 6% withdrawal rate), you will run out of money in roughly 15 years. But if you reduce that withdrawal rate to 5% and withdraw $25,000 every year, your money will last 19 years. These simple examples assume annualized portfolio growth of just over 4% and inflation of 2.32%. They are not adjusted to reflect the effects of taxes on withdrawals. Finally, if you withdraw just $20,000 every year, your portfolio of $500,000 will last almost 28 years.

Five retirement strategies to consider

1. Build a core bond allocation: An actively managed portfolio of high-quality bonds can serve as an anchor through changing rate environments and support your capital preservation goals.

2. Protect purchasing power: Consider adding investments that have historically counterbalanced inflation – Treasury Inflation-Protected Securities (TIPS), real estate and commodities.

3. Acknowledge the need for growth: Historically, stocks have provided the best growth potential for investors who are comfortable with the associated risks.

4.Work with an investment professional: Guidance from a qualified financial advisor can go a long way.

5. Broaden your horizons: With future returns from U.S. stocks and bonds expected to be lower, consider the potential benefits of foreign stocks and bonds or other income-generating options.

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