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Planning
for a Lengthy Retirement BY
MICHAEL P. HAUBRICH, CFP |
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There was a time when a Stephen
King novel was about the only form of writing that could make my palms sweat
and my heart accelerate. Recently, however, I’ve been doing a lot of reading
about problems and challenges related to retirement longevity and future
investment returns that have provoked a disturbingly similar response. According to
2000 Census figures, we have over 60 million citizens between 45 and 64—prime
investing ages who will be retiring. Now, we’ve all heard enough about the
aging Baby Boomer (those born after 1945) population. However, few of us may
have extrapolated that information into implications on length of retirement,
investment liquidations funding retirement expenses, and other financial
planning considerations. Thanks in large
part to medical advancements, new and improved drug therapies, emphasis on
healthy lifestyle choices, work/family balance initiatives, and a host of
other factors that contribute to long life, people are, well…living longer.
In some cases a lot longer. It’s now conceivable that a person could retire
early, celebrate a 120th birthday, and recognize milestones of 40, 50 or even
65 years of retirement! That is a long time to live off a retirement
portfolio, regardless of how well it performs. Will those retirees outlive
their money? Over the course
of a decade, the market can take wild twists and turns, depleting a healthy
portfolio into a dried remnant of retirement dreams. Given the length of time
that Baby Boomers are facing in their retirements, planners have to rely on
something other than traditional theories to build scenarios. Unfortunately,
there’s not a great deal of data available on which to rely, but newer models
and theories are beginning to emerge that factor in lengthy retirements. Add to this the
increasing consensus that future investment returns are going to be less than
what we have enjoyed in the past. According to one study surveying the
opinions of economists, academics, and financial analysts, future long-term
stock market returns adjusted for inflation (real return) will range from 3
to 5 percent. This is in contrast to the 8 percent real returns that
investors realized over the past 50 years. With this
forecast in mind, some planners are advocating a model that calls for retirees
to receive no more than 4% of their original portfolio in the first year of
retirement. To determine future disbursements, the first 4% is converted to a
dollar amount and then indexed to account for inflation. Let’s say you have
$1 million in your retirement portfolio. The first year you take out no more
than $40,000 (4% of $1 million), the next year you adjust for inflation
(let’s say 3%, for example), and you’ll receive $41,200 and so on through 30
years of retirement during which time market volatility is a constant threat.
Under this model, you will never run out of funds assuming you are
able to earn a real rate of return of 4% on your portfolio. Another method
is to withdraw no more than 5% of the value of your portfolio each year. As
the portfolio value fluctuates so will the distributions. If real returns
average 5% or better during your retirement life, you will never run out of
funds. If real returns are less than 5%, your portfolio will slowly lose to
inflation. That becomes a real problem when you face 40 or 50 years of
retirement. If this sounds
complex, that’s because it is. Our futures are filled with uncertainty. None
of us can know how long we’ll be retired. We spend our working years trying
to ensure that when we do retire, we can live comfortably on what we’ve
managed to sock away. A Certified Financial Planner can construct a variety
of scenarios that will help you plan appropriately for the possibility of a
long and financially comfortable retirement. Michael Haubrich, CFP, is president of Financial Service Group,
Inc., a registered investment advisory firm in |