The Real Risks of Retirement Investing

To anyone on the glide path to retirement, it is becoming clear that today’s retirees are facing a completely different set of challenges than prior generations. This is the first generation in which retirees are carrying mortgages and other debt into retirement. Health care costs are expected to eat an ever increasing piece of the retirement budget. An increasing number of people are entering retirement sandwiched between the needs of their financially-troubled adult children and their aging parents. In view of the increasing costs of retirement, the traditional notion that retirees will only need 70 percent of their working income could very well be a dangerously misguided assumption.

Add in Longevity Risk

Compounding these challenges is longevity risk, which wasn’t much of a concern for prior generations. While most people may understand they can expect to live longer, few realize that life expectancy is constantly expanding, meaning that the older you get, the greater you can expect to live. Today, there is a one in four chance that one of the spouses of a 65-year old couple will celebrate their 95th birthday, and it is more than likely to be the wife. The greater risk is that few 65-year old people fully grasp the enormity of this risk.

The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3%, the cost of living will double in 20 years which could put many retirees’ life style in jeopardy. Any resurgence of inflation to the levels seen in past decades could have a devastating impact on the lifetime income value of your assets.

Add in the Risk of Investing too Conservatively

For many people, the further they move down the retirement glide path, the greater the temptation to invest more conservatively, which is understandable. However, tilting your allocation towards conservative investments too quickly can expose your financial security to a much larger risk, which is the loss of your purchasing power at the time you really need it.

The chart below illustrates the erosion of purchasing power on earnings generated from an investment in 10-year Treasury Bonds. The decade of 2000 – 2009 had one of the lowest rates of inflation, as measured by the Consumer Price Index, in the last 30 years, yet purchasing power on the earned income was reduced by 25 percent. It is important to note that the CPI, which is the official government measure of inflation, doesn’t include food and gas prices which have increased at rate three times the CPI over the last couple of years. If food and gas prices were included in the CPI, the rate of inflation would be closer to 10 percent, and, at that rate, the net purchasing power of earnings in ten years would be less than the initial investment, meaning you would have lost money.

Investing your money in safe or guaranteed instruments may provide peace-of-mind that you won’t lose any money due to market fluctuations; however, each day that your returns fail to exceed the rate of inflation, you are, in effect, losing money, and that loss becomes more pronounced over time.

Conservative Investing is about Managing All Risks

There are ways to invest conservatively that can reduce portfolio volatility while addressing the risk of inflation. The key is in knowing what your financial objective is in real terms by factoring in the true cost-of-living and taxation. Once you know the real rate of return that must be achieved to provide lifetime income sufficiency, a diversified portfolio of equities and fixed-income securities can be constructed to match your particular risk profile With an investment strategy tailored to your specific needs and objectives, you need not take any more risk than is absolutely necessary to achieve your objective. A well-conceived investment strategy focuses on managing the risk and volatility of your portfolio; your job is to stay focused on your objective.

Bio for byline article: Esteemed personal finance pro Ray LeVitre, CFP, author of “20 Retirement Decisions You Need to Make Right Now” and Founder/Managing Partner at Net Worth Advisory Group. This 19+ year industry veteran helps individuals make key financial decisions during that critical yet oft underestimated period transitioning from the workforce into retirement—many of which are irrevocable and profoundly affect one’s financial security and lifestyle for decades beyond. He may be reached online at www.NetWorthAdvice.com.

Source: National Association of Realtors, Economistsoutlookblog.realtor.org

5 Steps Helping Ensure Adequate Retirement Income

Expert tips for cultivating a nest egg that ‘really’ meets your nearing retirement needs

Written By Merilee Kern, MBA

While plenty of people are duly committed to saving for retirement through 401k, IRA or other nest egg-inducing personal finance plays, however devotedly and even over many years, it turns out several may actually be suffering a false sense of security. This as recent findings by the Employment Benefit Research Institute reveal that far too many may not be poised for a financially secure retirement.

The study found that a staggering majority (82%) are not very confident in their ability to retire comfortably; that fully one-third of people aren’t confident they will be able to cover basic living expenses in retirement; and that nearly half of Americans aren’t confident they will be able to cover their medical expenses once they’re retired; among other ominous revelations. It’s no wonder that almost one-third of workers report that preparing for retirement causes them to feel mentally or emotionally stressed, which is understandable given the bulk of respondents (82%) don’t’ feel “very” confident that they are doing a good job preparing for retirement. Scary stuff.

“For many years, financial planners have espoused general formulas for determining the amount of income retirees will need, the most popular being the ‘70 percent rule’ that suggests that retirees will need to replace just 70 percent of their pre-retirement income to provide for their living needs in retirement,” notes Ray LeVitre, CFP, author of “20 Retirement Decisions You Need to Make Right Now” and founder/managing partner at Net Worth Advisory Group—a firm specializing in retirement financial planning.

“That may have been an effective guideline a few decades ago when the rule was established; however, for many retirees, relying upon it today may be fraught with financial peril. It’s a very different world today, and old guidelines based on conditions that existed 30 years ago don’t necessarily reflect real costs of aging today. Compounding the complexity is that many retirement decision you make today are irrevocable, profoundly affecting one’s financial security and lifestyle for decades beyond.”

 

According to LeVitre, modern-day aging cost considerations include:

  • A male turning 65 years old today can be expected to live another 19 years versus 11 years in 1970; for women, they can expect to live another 23 years
  • The chances of retirees or an elder family member requiring some form of long-term care is 7 in 10.
  • Many of today’s retirees are carrying some form of debt into retirement, including mortgages, consumer debt and student loans.
  • Although inflation has moderated somewhat since the 1970s, lifestyle costs, such as housing, food and transportation consume a larger portion of a retiree’s budget today.
  • Although health care cost increases have slowed, the rate of cost increases continues to be well above the general rate of inflation.

LeVitre adds, “For many retirees, the 70 percent income replacement rule might be an acceptable baseline for planning. However, with the risk of inflation compounded by longevity risk now confronting retirees, income planning should be based on the realities of aging today. It’s not inconceivable that, for some retirees, their income replacement need could be as high as 100 percent.”

With this in mind, I asked LeVitre what baseline, foundational steps those within 15 years of retirement can do to enhance lifetime income sufficiency. Here’s what he had to say:

  1. Track your expenses now. You should begin to track your living expenses and gradually adjusting your budget to smooth out your consumption between your living requirements now and your requirements in retirement.
  2. Start living like a retiree now. Taking it a step further, you could take the approach of changing your lifestyle now to reflect how you expect to live in retirement. That might mean downsizing your home now, reducing your leisure travel, driving more efficient cars, and generally adopting a more frugal mindset.
  3. Increase your savings. Any combination of the first two steps should generate steady increase in excess cash flow which should be saved for retirement. Pre-retirees within 15 years of retirement should target a minimum of 15 percent of their earnings for contributing to their retirement.
  4. Start exploring your Social Security options. Retirees who are able to postpone their Social Security benefits until age 70 can significantly boost their lifetime income; and additional Social Security planning for spousal benefits could increase it further.
  5. Don’t invest too conservatively. Although the natural inclination is to reduce your exposure to risk-based investments like equities the closer you are to retirement, reducing your exposure by too much, too soon could stunt the growth of your capital. To ensure lifetime income sufficiency, today’s retirees should always have some exposure to equities. A broadly diversified, well-balanced portfolio of equities, bonds and cash offers the best opportunity to maintain the necessary growth of capital needed while minimizing volatility over the long-term.

LeVitre also underscored that, regardless of your planning method or process, it would be a mistake to succumb to standard formulas or a generalized approach to retirement planning.

“Right now, your retirement vision—formed by your specific needs, wants, attitudes and beliefs—rests in your mind, and it will undoubtedly change as your outlook and priorities change,” he says. “But, you should always base your income needs on realistic assumptions.” Read: it’s time for America’s aging population to do a collective fiscal-future reality check.

Merilee Kern

Merilee Kern

Branding, business and entrepreneurship success pundit, Merilee Kern, MBA, is an influential media voice and lauded communications strategist. As the Executive Editor and Producer of “The Luxe List International News Syndicate,” she’s a revered consumer product trends expert and travel industry voice of authority who spotlights noteworthy marketplace change makers, movers and shakers. Merilee may be reached online at www.TheLuxeList.com. Follow her on Twitter here: http://twitter.com/LuxeListEditor and Facebook here: www.Facebook.com/TheLuxeList.

Source: https://www.ebri.org/pdf/briefspdf/EBRI_IB_431_RCS.21Mar17.pdf.