Will You Outlive Your Income? How to be Certain You Won’tSubmitted by Oak Brook Financial Group, Ltd on January 29th, 2015
While our extended longevity should be greeted with gratitude for the possibility of enjoying a longer life with our grandchildren, many retirees are approaching it with trepidation, wondering if their hard earned assets will be sufficient to fulfill their vision of a good life for the rest of their life – however long it should last. At the critical point when assets are to be converted to income and a spend-down plan is launched, retirees need the assurance that they won’t outlive their income, which, to some retirees would be a fate worse than death.
Old Rules of Thumb Have Become Dangerous Assumptions
Unfortunately, the traditional and outdated retirement planning models espoused by the media and the general financial services population only serve to generate more angst among retirees. Not only do many of them still adhere to the old “allocate for your age” asset allocation strategy, they continue to base their spend-down plans on the traditional life expectancy model that requires us to die on time in order for the plan to work. In today’s near-zero-interest rate environment and in the face of life spans that can expand to age 100, these planning assumptions dangerously defy current realities.
There was a time, a few decades ago, when stock market returns and bond yields worked effectively in combination to generate stable and relatively good returns for retirement portfolios. It was then when the “allocate for your age” strategy provided retirement savers with a reasonably sound formula of asset allocation that, when adjusted for your age, would automatically moderate the portfolio’s volatility, reduce risk while still producing targeted returns. For instance, a 40 year old would be advised to allocate his age in bonds and the balance in equities – 40% bonds, and 60% stocks. At age 50, with 15 years left before retirement, he would adjust his allocation to 50/50. By age 60 - 40/60, and then by age 65 his allocation should be 35% bonds and 65% equities. This allocation strategy would continue throughout his life – 20/80, 10/90, etc.
With stocks and bonds generating steady returns throughout the 1990 and 2000s, this strategy would allow most retiree to draw down 4% of their assets to produce sufficient income for the rest of their lives – which, by the way, were shorter than today’s retirees. But during the next two decades, as bond yields decreased, and stock market volatility generated flat to low returns, financial advisors were forced to make some “adjustments” to their strategies in order to prevent an income shortfall before life expectancy. But, instead of changing the asset allocation, they experimented with decreasing the spend-down rate. So, instead of drawing down 4% of assets, retirees were advised to draw down 3% with some going even lower.
The Good News Is That There Is An Alternative
The fact is that retirement savings such as 401-K's and IRA's that are primarily invested in stock market-based vehicles, have no predictability… there is no way to know exactly what those accounts will be worth when trying to determine how much income you will have during retirement, or if it will last as long as you do.
Relying upon a retirement plan that is Safe, Predicable and Guaranteed to grow, as well as having a retirement income that is guaranteed to last for their lifetime, would be a dream come true for most people. Both of these are possible when you implement the right strategies in your financial plan and stop relying entirely on your risk-based investments to provide a comfortable retirement.
By incorporating the right strategies into your overall retirement plan, it is possible to know exactly what your retirement plan will be worth on the day you retire, and to have a retirement income stream that will last as long as you do. Dreams can come true!
Of course, these financial strategies may not be appropriate or suitable for your particular financial situation, but to find out if they could work for you, click here to schedule a call to get more details.