In all our years of financial planning, the most common question we hear from people over the age of 65 is “Will my money last as long as I need?” The answer is often ’Yes’ IF you’re willing to take an honest look at your retirement income expectations, and make some important decisions as early as possible.
At this point in the conversation, there’s often an uncomfortable silence. No one likes to think of the consequences of running out of money in retirement. But to avoid that scenario in today’s environment, we need to carefully reconsider some long-held beliefs and assumptions.
Let’s start with the fact that in 1966, the average 65-year-old lived to 76, meaning they could look forward to 11 years of retirement. Today, that same person would have 18 years of retirement. Even more interesting is the fact that a healthy couple at age 65 has a 63% chance that one of them will live to 90 – that’s 25 years of retirement!
A quarter century is a lot to save for. If you have already retired, there’s a good chance you have all the savings you’re going to accumulate. So what can you do to make sure it lasts?
First, address your expenses. Some planners create retirement budgets using a simplified formula of 70% of pre-retirement income. But we find that individual circumstances demand a deeper assessment. Things such as your health (over half of all healthcare you consume will be over the age of 65), and lifestyle choices can create a dramatic range of retirement income needs.
Underestimating your retirement expenses is a sure-fire way to run out of money.
Second, maximize the effectiveness of the savings you have. There are many ways to approach this, with market conditions being a critical issue. The last market downturn starting in 2008 saw a 35% decrease and took nearly 37 months to recover to its pre-slump levels. The really scary thing? There have been seven downturns since 1973 – or roughly one every six years. In your 25-year retirement, you could theoretically face four market downturns. For those who haven’t completely blocked out the painful memories of reading investment statements in the last downturn, this should be a sobering thought.
Different investment vehicles offer different levels of exposure to market fluctuations. Many people aren’t fully aware of the risks of the asset classes they are invested in. And because of that, a lot of seniors we talk to have a serious gap between their perceived level of risk and their reality.
Warren Buffett, the well-known value investor says “You don’t know who’s swimming naked until the tide goes out.” Unfortunately, many investors didn’t realize how exposed they were to market conditions until the last downturn. Being aware of your exposure to market conditions is a critical way to make sure your investments can meet your retirement income needs. (This article offers more info on other financial risks.)
If markets carry a lot of risk, it can be tempting to just hide your retirement savings under your mattress. But the reality is most seniors need some opportunity for growth in their portfolio to ensure their savings last as long as they do. The key strategy here is good old-fashioned diversification. When investing, putting all your eggs in one basket can be a fatal mistake. When you’re over 65 and counting on your investment returns, diversification is more important than ever.
Diversification means more than just balancing a portfolio of stocks and bonds. It requires a careful and thorough assessment of all the pressure points in your investment plan to diagnose your level of exposure, and prescribe the right solutions. This type of stress test goes a long way toward preventing the ‘pants down’ scenario that Buffett describes.
Will you have the retirement income you need? It’s a different answer for each person’s unique circumstances. But if you’re willing to honestly ask the question, you’ll be a lot closer to answering ‘yes’.