During this past decade, the ability to retire successfully has been a tremendous challenge. Many of those retiring in 1998 and 1999 thought the investment markets would always go up, and that 18% to 24%, or even higher, were normal returns. The recession and market correction of 2000 through 2002 forced many retirees to go back to work or significantly reduce their standard of living. The correction and recession of 2007 through 2009 has most likely had a similar impact.
Market corrections and recessions are not new and should be expected several times during retirement. Since these market corrections are expected, then perhaps the best option is to stay out of the markets during retirement. However, unless the size of the nest egg is very large and spending habits are extremely tight, staying out of the markets may be a sure bet of running out of money. Clearly, not every retiree faces the same circumstances. Thus, my following comments are generalizations and may not fit each particular need.
If retirement is supposed to be the years to relax and enjoy the fruit of decades of hard work, many retirees are singing a different tune. From going deeper into debt, curtailing expenses, and in some cases selling assets, many are not experiencing the retirement of their dreams.
Several factors must be considered when planning a successful retirement. But, when expectations are too high, or other steps are ignored, a successful retirement can be in jeopardy. Some of the steps to a successful retirement include:
Expecting personal spending during retirement to be higher due to a change in activities
Recognizing annual withdraws from investments must go up and down with market changes
Anticipating unexpected expenses
Planning for longer life expectancies
Expecting higher costs due to inflation
Managing investments for changing economic and risks requirements
Increasing spending during retirement is not hard to do. In many cases, services that used to be paid by an employer are now being paid personally, such as health insurance. Due to the change in how the income is received, whether by pension or distributions from investments, it is easy to spend the amount deposited each month and not plan for intermittent expenses such as taxes. Careful analysis of spending prior to retirement and anticipating new expenses should help retirees properly budget and thus avoid over spending.
High expectations are always a disaster waiting to happen. Many studies have shown that a four to five percent annual withdrawal rate from investments should allow the investments to last a lifetime. Of course this is true provided equities are still in the allocation. Higher withdrawals rates can be used and sustained provided additional measures are also taken. But the expectation that pulling seven percent or higher each year from investment assets without the consequence of potentially running out of money may lead to a severe correction in life style.
Life always seems to throw curve balls when something else is expected. Whether it is a new roof costing thousands more than anticipated or a change in health creating the need for long term care or costly medications, a number of unexpected events can impact retirement. Making sure funds are set aside or insurance coverage is in place will reduce or avoid negative consequences.
During the last few decades, the length of retirement has continued to increase. Failing to anticipate a long life expectancy can cause the last five or ten years to be more of a burden on family members versus a life of independence. Whether one or both spouses live to age 90 or 95, the odds have increased significantly that at least one will reach this age.
Inflation is always the silent thief. Year-in and year-out, inflation slowly erodes the standard of living for many retirees. Without the ability to increase income from growing investment portfolios, reductions in spending will be necessary to avoid running out of cash. Withdrawing lower amounts from investments, and thus permitting the portfolios to grow, may help combat the impact of inflation.
Many investors feel that simply putting money away is enough. Proper allocation of funds, ongoing management and decision making, and reacting to current market conditions can make a huge difference in the bottom line. This requires a financial professional committed to daily oversight of retirement funds with a true understanding of the entire financial industry.
For help with managing investment assets, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.