Money In Motion March 2014

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Wise Decisions with Retirement in Mind

Certain financial and lifestyle choices may lead you toward a better future. Some retirees succeed at realizing the life they want, others don’t. Fate aside, it isn’t merely a matter ofstock market performance or investment selection that makes the difference. There are certain dos and don’ts – some less apparent than others – that tend to encourage retirement happiness and comfort.

Retire financially literate. Some retirees don’t know how much they don’t know. They end their careers with inadequate financial knowledge, and yet feel that they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.

Retire knowing that you’ll have to assume some risk. Growth investing is increasingly seen as a necessity for retirees who want to keep ahead of inflation.

According to data and research compiled by the Social Security Administration, the average 65-year-old man will live to be 84 and the average 65-year-old woman will live to be 86. So that’s a 20-year retirement. The SSA also notes that roughly a quarter of today’s 65-year-olds will live past 90, and about 10% of them will live beyond age 95.1  

If these seniors rely on fixed-income investments for the balance of their lives, they may end up with reduced retirement income potential, and in turn a reduced standard of living. Look at the Rule of 72: if an investment is yielding 2%, it will take about 36 years to double your money. Yes, interest rates are rising – but inflation should rise with them.2

A generation ago, mature Americans were urged to gradually shift their portfolio assets out of stocks and into fixed-income investments. One old rule of thumb was to subtract your age from 100, with the resulting number being the percentage of your portfolio you should assign to equities.3

Today, retirees and retirement planners are reconsidering this thinking. As the Wall Street Journal reported recently, one study of retirement money and longevity risk concluded that retirement funds may last longer if a retiree gradually increases the stock allocation within a portfolio about 1% per year from an initial range of between 20-50% to between 40-80%. The concept here is that a retiree’s stock allocation should be lowest when their retirement nest egg is largest.3

Retire debt-free, or close to debt-free? Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.

If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent.  

Retire with purpose. There’s a difference between retiring and quitting. Some people can’t wait to quit their job at 62 or 65 – their work is “killing” them, or boring them senseless. If only they could escape and just relax and do nothing for a few years – wouldn’t that be a nice reward? Relaxation can lead to inertia, however – and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.

A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other’s dreams are in a good place.

The bottom line? Retirees who know what they want to do – and go out and do it – are contributing to their mental health and possibly their physical health. If they do something that is not only vital to them but important to others, their community can benefit as well.

Retire healthy. Smoking, drinking, overeating, a dearth of physical activity – all these can take a toll on your capacity to live fully and enjoy retirement. It is never “too late” to quit smoking, quit drinking or slim down.

Retire in a community where you feel at home. It could be where you live now; it could be a place hundreds or thousands of miles away where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then “find your tribe” – look for ways to connect with people who share your experiences, interests and passions, and who encourage you and welcome you. This social interaction is one of the great intangible retirement benefits.

Citations
1-ssa.gov/planners/lifeexpectancy.htm [2/6/14]
2-investopedia.com/terms/r/ruleof72.asp [2/6/14]
3-tinyurl.com/m8akefj [2/3/14]

Throwing Out the 4% Rule

In 1994, a financial advisor named Bill Bengen published research articulating the “4% rule”,which became a landmark of retirement planning.The 4% rule postulates that a retirement nest egg can last 30 years if a retireewithdraws 4% of it per year (incrementally adjusted for inflation), given a portfolio of 50% stocks and 50% bonds. Bengen studied numerous 30-year stock market time spans to arrive at his theory, which many retirement planners took as a guideline.

Lately, the 4% rule has taken quite a bit of flak. At age 20, it looks less and less valid. Why? Two factors leap to mind.

The return of significant volatility. Bengen came up with the 4% rule during the 1982-2000 bull market, the greatest extended rally Wall Street has ever seen. Across that period, the S&P 500 rose 1153.94% (and 2041.47% with dividends reinvested). The S&P’s annual total return averaged 19.02% in that time frame. Back then, retirees and retirement planners harbored assumptions of double-digit annual returns, and withdrawing 4% a year from retirement savings seemed conservative.2

The bear markets of the 2000s were a rude awakening. Someone who retired in 1979 with a 50/50 mix of stocks and bonds in their portfolio would have enjoyed an average annual total return of 13.75% for the next 20 years – but a portfolio equally divided between stocks and bonds would have returned less than 4% in recent years, even in this current bull market. That brings us to the second factor.1

Low yields from fixed-income investments. In 1990, the 10-year Treasury returned better than 8%. In 2012, it yielded around 2%. Many fixed-income investments have yielded less than that in recent years. If you are withdrawing 4% a year from your retirement savings and less than half your retirement portfolio is invested in equities, you are staring at a problem.3

No retirement planner would urge retirees to put all their money in stocks – the volatility risk is just too great. Assigning half (or more) of a retirement portfolio to debt instruments, however, presents an undeniable opportunity cost. Consumer prices are rising only slightly, but interest rates remain in the vicinity of historic lows; retirees who want to keep ahead of inflation aren’t making much progress by investing substantially in bonds, and inflation may subtly erode their spending power.

The 1990s are gone, along with the old retirement planning assumptions. Even Bengen is revisiting the 4% rule today. He retired in 2013, and conceded in Barron’s that “we could have low returns for a long time … we’re in uncharted territory. It’s very hard to predict what will happen.” Recently, some respected voices in the financial services industry – including analysts at T. Rowe Price and American College professor Wade Pfau – have argued that retirees may be better off withdrawing roughly 3% of their savings each year.1 

The era of “set it and forget it” has passed. Determining a retirement withdrawal rate today means considering plenty of variables, including changing market conditions and emerging economic trends.

Citations
1-online.barrons.com/articleSB50001424053111903747504579177903984944392.html#articleTabs_article%3D1 [11/9/13]
2-financialsense.com/contributors/james-j-puplava/how-to-give-yourself-an-annual-pay-raise-part-1 [4/23/12]
3-frbsf.org/economic-research/publications/economic-letter/2013/july/cause-decline-long-term-us-government-bond-yields/ [7/13]

Don’t Think You Need Disability Coverage?

Think again. We all want to leave this world with our financial affairs in good order. So we draft a will and an estate plan and purchase life insurance. But few of us consider disability insurance – the coverage that can help us maintain our income and quality of life while we are alive.

Statistics show that people in their 30s are three times more likely to suffer a long-term disability than they are to die. The non-profit Council for Disability Awareness notes that the average long-term disability claim duration is 31.6 months, and that one in eight workers will become disabled for at least five years during their working careers.1

A fate worse than death? In financial terms, maybe. Consider this – when you die, your income stops. But so do your expenses. If you are severely disabled and cannot work, your income stops, but your expenses do not. In fact, due to the cost of medical treatment, your expenses may even increase.

Will the government take care of you? Many disabled people discover that they don’t qualify for state assistance. Others find that the amount or length of coverage available is not sufficient to support them. It’s an all-too-common story.

It’s time to start thinking about disability insurance. We’d all like to believe that we’ll never be disabled. But the reality is that it could happen to you. If it does, will your family be taken care of? Will you be prepared?

May is Disability Insurance Awareness Month so why not find out about the options that are right for you.

Citations
1- disabilitycanhappen.org/chances_disability/disability_stats.asp [7/3/13]

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