Most retirees have a plan. Miss one of the four key numbers in your calculations, and you could be headed for disaster. Investing in retirement can be tricky, as it requires that you consider several factors of lesser concern to younger investors. Make a mistake and you could find yourself surviving on less income than you planned, paying more in taxes, or leaving a smaller legacy to your heirs.
- Planning for the right time horizon. Longevity is the #1 risk facing retirees. Your life expectancy, if you are now 65, is at least 20 years more; but that represents an average. Many seniors live much longer. In fact, a 65-year-old male has a 25% chance of living past 92; a female has a 25% chance of living past 94. Thus that 20-year number isn’t very useful when it comes to individual planning.
- Market Risks. Retirees still need to invest a portion of their egg for growth yet cannot afford to take on the same level of risk as a younger person, because there is less time to make up for bad decisions.
- Inflation. Most investors do not realize that your income must double every twenty years just to keep up with the average rate of inflation. Many pensions do not include a cost-of-living adjustment; thus your personal savings will have to either grow adequately to cover inflation, or be large enough to allow you to draw an ever-increasing amount of income.
- Starting retirement with too large a draw-down. The amount of income you need to draw from your savings to maintain your lifestyle will increase with time. Other costs, such as medical expenses, will likely also rise as you grow older. Most retirees will need to start somewhere in the 3% to 6% range, then allow increases to that amount for inflation. Figuring out what you should take will require analysis of your life expectancy, the number of guaranteed lifetime income sources you have (such as pensions or annuities), and the composition of your portfolio.
In conclusion, when it comes to developing your financial plan for your retirement, you need to pay close attention to details that were less important when you were younger. Fortunately, it is possible to structure most portfolios to protect yourself from running out of money. Your best defense is to address your specific needs, concerns and desires, and ask for help from your financial institution or financial professional to develop a plan and portfolio that will allow you to sleep comfortably in the knowledge that your life will remain financially secure.
We are or become those things which we repeatedly do. Therefore, excellence can become not just an event but a habit. – Albert Einstein
You must be the change you wish to see in the world. – Mahatma Ghandi
Published with permission from Grant Hicks