GOLDEN VALLEY, Minn.- You’ve spent much of your career building a nest egg for retirement. But now, as retirement approaches, your focus may need to change. Let’s consider. Dan Ament, Financial Advisor with Morgan Stanley discusses the various challenges you will face during your golden years to avoid cracking your nest egg.
We Are Living Longer - 55-year old man has a 76% chance of reaching age 90, while a woman of the same age has an 82% chance. What’s more, the probability that at least one of them will reach age 90 is 96%. That means generating enough income to meet day-to-day expenses for possibly 30 years or more—an especially daunting challenge in an environment where few sources of guaranteed income are available to you. Source: Society of Actuaries 2015
Market Volatility – Market ‘corrections’ are frequent. Despite below normal volatility in recent years, the S&P 500 stock index has experienced an average annual 10-12% intra-year decline over the past 26 years. While we can't predict or prevent market swings, market swings and “Black Swan” events are always a possibility. When they occur, they can have a profound impact on financial markets. If they occur early in your retirement years, the result can weigh even more on your nest egg intended to last decades. These days, trading is often conducted electronically at lightning fast speeds among numerous participants around the world. The advent of technology and social media has accelerated the speed at which decisions are made. Put it all together and the climate is conducive to greater volatility than we’ve experienced in the past.
Don’t Forget About Inflation - Inflation is the rate at which the prices of goods increase on an annual basis. It’s hard to believe, but on January 1, 1981, the U.S. inflation rate was a whopping 13.9%. Fortunately, in recent years it’s been hovering between 1% and 3%. For example; $1,000 today will only be able to purchase $552 in goods 30 years from now with a 2% annual inflation rate. With a 3% rate, that $1,000 will only buy you $412 worth of goods. And if inflation goes up to 5% or 6%, the results could be far more drastic. Health care costs, for instance, can be particularly onerous. According to a 2015 study conducted by Healthview Services, the average lifetime retirement health care premium costs for a 65-year old healthy couple retiring this year and covered by Medicare Parts B, D and a supplemental insurance policy will be $266,589.3
A New Chapter – Managing Your Investments for Retirement - Years ago, once in retirement, an oft-used strategy was to reallocate your portfolio from predominantly equities to predominantly fixed income and lived on the interest generated by their holdings. With today’s interest rates near record lows and life expectancies expanding, this strategy may no longer be viable. One potential strategy is the 4% solution. By withdrawing 4% a year from your retirement assets, you aim to avoid depleting your nest egg for approximately 25 years. The 4% comes from a statistical analysis technique called Monte Carlo simulations. This strategy, however, is not foolproof. There’s always the chance that you could live longer than 25 years and run out of money at age 90 or so.