Money Matters: Your Retirement Track: Train Wreck or Grand Central Station?

Being the youngest of four children with five years between each of us, placed me at a relatively young age when my father reached retirement. I was out of college and started working in Dallas at the time my father was deciding on benefits for his retirement years.

I recall at that time being curious how many more years I would have my father in my life, since he was now ‘retired’ and was in his mid 60’s. Today, mid 60’s is almost considered mid-life, since those over 90 are the fastest growing age bracket.

I am blessed, as my father is still here and doing very well. He took up weightlifting at age 90 and still drives himself on errands as well as to his weekly Lion’s Club luncheon where he lives in Midland, Texas. I asked him not long ago, if he had ever imagined he was going to live into his 90’s. His response was, "Of course not."

Today, those wishing to retire at age 60 or younger will almost have an equal number of years in retirement as they worked. Those with whom I speak rarely acknowledge their retirement may be headed for a train wreck because they will either run out of money or have to lower their standard of living significantly to make ends meet. But, few have confirmed
their assets will meet their future spending needs.

Living longer is just one of the issues facing retirees today. Another is the impact inflation has on expenses during this longer living period. One thousand dollars of expenses today will be $1,400 in ten years, $2,000 in twenty, almost $3,000 in 30 years, and about $4,000 in 40 years. While Social Security is adjusted for inflation, you can ask almost anyone who is collecting Social Security whether or not the income keeps up, and most will tell you it does not keep up with the actual costs they are experiencing. Since Social Security will not replace your pre-retirement earnings completely, most of you will have a significant gap to fill with other income between your pre-retirement take-home and your Social Security check. This means your own assets will need to be able to fill this gap or you must have other income sources such as pensions from other employers. Without the additional assets or income, your lifestyle may be impacted at some point during retirement.

For those about to retire, if the gap between pre-retirement earnings and Social Security is $25,000, you will need approximately $500,000 in assets to generate this amount of income to fill the gap. This amount should permit your asset base to grow and meet future inflation needs throughout retirement provided you maintain a diversified portfolio. Some financial professionals may project 7 or 8 percent earnings on your investments during retirement, and thus the assets needed are a lot less. But, I personally believe that is the fastest way to a train wreck. If eight percent is used and all of the earnings are taken, then the principal most likely will shrink over time. When shrinkage occurs, eight percent of the new total will no longer meet your lifestyle, and either it will have to be reduced or you will start taking principal as part of your distributions. Once principal is taken, this can start the spiral down of the value of your investment assets.

I have touched on this phenomenon before. There will be a change in your investment performance between the years of accumulation and the years of withdrawals. If you fail to plan for this impact, another train wreck can occur. Those that are fortunate and have accumulated far more assets than they need to meet their income, then this most likely will not be a concern. But for those who have just enough in investments or are perhaps short, most likely they will be facing some hard decisions in the future unless we are lucky to have a string of investment performances for the next few years where we see double digit growth. While it is possible, to bet on this as an outcome is taking a huge chance with your retirement.

The best way to avoid a train wreck is to know the path you are on and the speed at which you can go with taking distributions in order to reach "Grand Central Station".

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 21 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, SIPC.

© 2006 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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