Category: Retirement

Until recently, many retirees have been able to rely upon the three-legged stool of retirement income sources: A defined benefit pension plan that guarantees a lifetime income, their own savings, and Social Security. Within the last couple of decades, the first leg of the stool has all but disappeared as many defined benefit plans have been replaced with defined contribution plans such as a 401(k) plan.

This has shifted the responsibility for creating a retirement income source to the individual. With expanding life spans and increasing retirement costs, it will require serious retirement planning to ensure that your income will last a lifetime. Here are the four essential elements of a sound retirement plan:

Set Clearly Defined Goals

With an increasing life expectancy, it’s no longer enough to simply state, “I want to retire at age 65” as a goal. In order to inspire a well-conceived plan and the will to faithfully execute it, you need a clear vision of your life in retirement.

• Do you plan on actually retiring; or would you like to work in some other field?
• How will you live in retirement?
• Where will you live?
• What would you like to accomplish?

As you get closer to your retirement goal, your vision will become clearer and more focused. Along the way, your retirement goal becomes your investment benchmark, guiding your investment decisions based on where you are in relation to your goal.

Calculate Your Retirement Costs

One of the more popular rules suggests that retirees will need just 70% to 80% of their pre-retirement income to maintain their standard of living. The major flaw with this rule is it doesn’t account for the true cost of aging. In calculating the cost of retirement, the equation has become more difficult due to the new reality of expanding life spans which can also mean higher health care costs. The cost of your retirement needs to factor realistic spending assumptions based on your goals and desired lifestyle with contingencies for health care costs and unexpected expenses.

Once you know the cost or your retirement you can calculate how much you will need at retirement which becomes your accumulation goal.

Long-Term Investment Strategy

Accumulating enough capital to provide lifetime income sufficiency is a daunting task, made more difficult in an environment of low returns on savings and increased stock market volatility. It requires a serious long-term investment strategy with the confidence and discipline to follow it. It starts with a specific [investment objective], which can be stated as the return on investment that must be achieved to meet your capital need.

The next step is to develop a risk profile that will enable you to match your tolerance for risk with a portfolio of investments that can reasonably expect to achieve your objective.  This is done by developing an asset allocation plan that mixes different types of investments with varying correlation to one another.  Then, through broad diversification within the asset classes, you can reduce portfolio volatility and achieve more stable long-term returns.

Tax-Diversification

For decades we have been told that the best way to accumulate capital for retirement is through tax deferred savings vehicles, such as a 401(k) plan or an IRA. Although it still makes sense for accumulating capital, it doesn’t take into account the tax consequences of income withdrawals and its impact on the total spendable income available in retirement.  Retirement planning used to be almost entirely about capital accumulation; however, with the possibility of living 30 years or more in retirement, the emphasis is now on [managing your income during retirement].  If your only income source is a 401(k) plan, your income will be taxed as ordinary income.  With diversified income sources that include a Roth IRA for tax free income, or a non-qualified investment portfolio for long term capital gains, you can minimize your taxes in retirement which will help make your income last longer.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.

The need for retirement planning didn’t really exist until well into the 1970s. Up to that point, people worked until age 65, spent a few years in leisure through their life expectancy which was about 69. Many retirees of that era were able to coast into retirement with a cushy pension plan. Over the next few decades, as life expectancy continued to expand, as did the number of years in retirement, financial planners came up with simple rules of thumb for determining how much a person would need at retirement in order to maintain his or her lifestyle.

That’s where the 70 percent rule came from. People were told that they would only need 70 to 80 percent of their pre-retirement income to preserve their lifestyle throughout their golden years. While that may have worked for retirees back in the 1970s and 80s, it could spell disaster for today’s retirees.

It’s not your Grandfather’s Retirement Anymore

Today’s retirees face a whole new set of financial challenges. Many are carrying mortgages and other debt into retirement. Health costs have increased nearly ten-fold. And, because we are living longer these days, health care costs will consume an increasing piece of the retirement budget. About 50 percent of today’s retirees find themselves sandwiched between their own kids, who may still be in college, or struggling to break free of the nest – and their aging parents who may require assistance in their daily living. Some retirees are actually finding that their retirement income needs may be as much as 110 percent of their pre-retirement needs. So much for the rules-of-thumb.

Better to Manage your Risks than your Investments

Today’s retirement savers are finding that there are no certainties in the markets, or in the economy. The only certainties that do exist are the risks they face leading up to and all the way through retirement. The two biggest risks all retirees must confront are longevity risk and inflation risk. Unlike market risk, which can be avoided by simply taking your money out of the market, these two risks are inescapable. And, most people are either unaware of these risks, or have not fully grasped their significance in planning. It seems like decades ago that we experienced any real inflation. And, it has only been in the last couple of decades that the life expectancy rates have been accelerating.

For today’s retirees, longevity risk is a new phenomenon. While people may understand that they can expect to live longer, few realize that age longevity is constantly expanding, meaning that the higher your attainted age, the greater your life expectancy. The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3 percent, the cost of living will double in 20 years which could put many retirees’ life style in jeopardy.

Retirement as a New Life Cycle

For this reason, most retirees are viewing their golden years not as retirement, but as a new life phase in which earnings from some form of employment or a business may be a necessity. But, who says that is a bad thing. Many people can’t imagine themselves coasting through 30 years of life without being able to apply their skills or knowledge in a meaningful way. For many, it is an opportunity to regenerate themselves through new opportunities and new knowledge. Instead of an ending phase of life, retirement will be looked upon as a new life cycle in and of itself.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do.

Today’s retirees are finding that retirement requires at least as much psychological and emotional preparation as it does financial preparation. So, retirement planning needs to include a thorough assessment of human assets and liabilities along with an assessment of financial assets and liabilities. It is no longer enough for retirees to know how much money they will need to live; they need to know how they will be able to make the most of this new life stage.

By focusing primarily on financial issues, traditional planning reduces retirement to an economic event with its financial objectives marked by a finish line. The dangerous misconception it perpetuates is that, if you hit the finish line, on time and on goal, your planning is done and you’ll have a successful retirement. While it may address the financial goal of creating a sufficient standard of living, it doesn’t address the larger, more important issue of the quality of life.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Advisor Websites.

This isn’t our parents’ or grandparents’ retirement anymore. Just a few decades ago, many retirees enjoyed the full benefits of the “three-legged stool” of retirement provide by guaranteed pension payments, savings, and Social Security. In addition, they didn’t have to be very concerned with how much of their income translated into actual purchasing power because, except for the mid to late seventies, inflation was not a big factor for several reasons. Today, the three-legged stool is barely standing on two legs and inflation, even at the lowest levels, can wreak havoc on our lifestyles due to the fact we are living 12 to 15 years longer.

Financial Challenges Then and Now

The first reason why past generations were largely immune from inflation creep on their lifestyles was due to shorter life spans. A male retiring at age 65 in 1970 was expected to live 10 years into retirement – a female 12 years, so there was less time for inflation to have an impact. Secondly, nearly 75 percent of retirees received a guaranteed lifetime income from pension plans and many plans included a cost-of-living adjustment. For them, any retirement savings could be used as surplus. Third, back then the yield on savings vehicles were more closely linked to the rate of inflation so their future purchasing power was not impacted as much.

When we fast forward to the year 2013 we find that most people have never even heard of pension plans, and the vast majority of retirees have only their defined contribution plans (401ks and IRAs) to rely upon for their future income needs. And, it has only become apparent in the last several years that many have come up well short of the capital needed to sustain their lifestyle for a lifetime. While much of this can be attributed to over-consumption and the recent market crashes in stocks and real estate, we can also point to the lowest savings rate by a generation in our history. Add to that the current interest rate environment in which low savings yields have turned negative when factored for inflation, and we have a real savings crisis which will affect the next few generations and their ability to meet their retirement income needs.

Time to Get “Real” on Inflation

Speaking of inflation, today’s pre-retirees and retirement savers may not even remember the double-digit inflation that spiraled out of control from the late 1970s to the mid 1980s. While the “official” inflation rate of the last couple of decades has been miniscule by comparison, as measured by the Consumer Price Index (CPI), most people don’t realize that we are still experiencing double-digit inflation which is seriously eroding their purchasing power today and will make it very difficult to retire into a sustainable lifestyle long into the future. That’s because, following the sky high inflation rates of the 1970s and 1980’s, the government removed two of the biggest inflationary triggers – food and energy – from the basket of goods used to calculate the CPI.

So, their prices, which have been increasing the fastest over the last decade, aren’t even reflected in the official inflation rate, which is currently still hovering below 3 percent. When food and energy prices are added back in, the “real” inflation rate is closer to 11 percent; and that is the real impact on incomes today and in the future.

The High Cost of Living Longer

It wasn’t until just recently, when we had to confront our longevity. While most people are aware that we are living 12 to 15 years longer than our grandparents, what they haven’t firmly grasped is that longevity is not measured in static terms which says that, a person born today can expect to live until age 79. Rather, longevity, or life expectancy, continues to expand with each year we age. So, for example, while a 60-year old male can expect to live until age 81, that same male at age 65 can be expected to live until age 84. At age 70, depending on your health and family history, you have a 20 percent chance of living to age 90, and a ten percent chance of living to 100.

Now layer inflation risk onto longevity risk, which is really the risk of outliving your income, and suddenly they are compounded. Our grandparents only had to contend with inflation for 10 to 12 years. Their parents weren’t expected to live much beyond retirement (which is why Social Security seemed like such a good idea back in the 1930s). We need to contend with a “real” rate of inflation for as many as 25 to 30 years. At 3 percent inflation, we lose half our purchasing over 23 years. At 10 percent our purchasing power is cut in half in just 7 years.

Retirement Planning in “Real” Terms

Although we may have painted a rather bleak picture of the retirement outlook, there is really no reason for panic or despair. While the numbers and the realities may appear daunting, the fact is that the sooner your focus on retirement planning in real terms – that is using real assumptions base on your actual income and investment returns factoring inflation, along with a realistic measure of your potential life expectancy – the sooner you can have your retirement plan back on track. The key to mitigating the risk of longevity is to not minimize the effects of inflation compounded over your lifetime.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Advisor Websites.