Careful planning is required to retire comfortably

By Steven Fenyves, Founder of  Valued Wealth Management, Boca Raton

I know, I know. Many of you are saying “Who wants to live to be 100?”   But some of you are thinking “100? I’m going to live to 120!”

Perhaps today more than ever before, retirees face an important question, “Do I have enough money to provide an income that can support me for the rest of my life?”

With improvements in healthcare, diet and exercise habits, Americans are generally living longer lives and enjoying more active and vibrant retirements. Earlier retirement has also become more common, resulting in many retirees facing the challenge of outliving their retirement assets.

The fact is that a man age 65 has a fifty percent chance of living to 85. Once he makes it to 85 he has a fifty percent chance of living to 92.  For a woman the ages are 88 and 94; and for a 65 year old couple there is a 50% chance that one will live to 92 and at that point there is a fifty percent chance that he/she will live to 97!

Source: Annuity 2000 Mortality Table; Society of Actuaries

So how do you make your money last? 

You start by imagining everything you want to do in retirement and the legacy you wish to leave behind (which is not necessarily financial). You prioritize those dreams, and you plan how to allocate your financial resources so that the next phase of your life is all about living it.

As much as our focus naturally goes to how we can ration the assets that we have or safely earning a better return on our investments, it is just as important, if not more important, to avoid two major retirement hazards.

Two Major Retirement Hazards

1. Misjudging how long you or your spouse will liveAs advancements in medical technology results in longer life expectancy, the chance exists that either you or your spouse will live past the age of 90. (Annuity 2000 Mortality Table; Society of Actuaries)  Therefore, it is vital that you are prepared to live longer. 2) Underestimating the cost of healthcare

          As healthcare costs continue to rise dramatically, employers are shifting more  of the costs onto their employees. Many companies are also starting to drop  retired workers from their health plans. Long-term health costs can be especially devastating to your retirement.

     Once these potentially devastating possibilities are addressed, you can move on to the financial realities.

   Not everyone has a pension that they can count on.  Almost all of us receive, or will receive, Social Security.  Social Security is a base to build upon, but how about the rest of your income needs?  The assets from which you expect to create a stream of income during retirement face many risks, including risk from economic turmoil, interest rate uncertainty and market volatility.  With interest rates near zero, there is a risk of eating through your principal simply because you need more to live on than your investment is earning. Because of these and other factors, it is vital to correctly position your assets into a series of investments that is designed to provide income that will last your lifetime.

   In my practice, I don’t believe that any one type of investment is appropriate by itself. Just about every asset class (bonds, stocks, annuities, CDs, etc.) can benefit a portfolio if used properly. Each also has its own set of risks, including the possible loss of the principal amount invested. Bonds, whether they are government, corporate or municipal, have interest rate risk and reinvestment risk.  Stocks (and stock mutual funds) subject your investment to the volatility that we’ve become all too familiar with. Annuities reduce or eliminate your access to your investment and CDs generally don’t even keep up with inflation (it’s what we can buy with our money that counts, not the dollar amount).

   I don’t have a problem with any of these asset classes. I just don’t think it’s smart to have all of your money exposed to just one type of risk. It’s too risky!  By appropriately diversifying among different asset classes, and therefore different types of risk, you can reduce the chances that any one event, shift in interest rates, or stock market decline will threaten your standard of living.

   In my experience, the best way to provide you with both current and future income is a time-segmented and inflation-adjusted approach.  This type of plan segments your investable assets into “buckets”.  Each bucket is set up to provide income during a set period of time.  The money that you will need in the short-term* is invested for safety and stability. This first bucket of money provides you with a stream of income during the first years of the plan.  Each successive bucket is designed to grow over time with the goal of refilling the previous bucket as it gets depleted (in the case of the first bucket) or is used to refill the bucket in front of it. The earlier buckets should be larger and filled with more conservative investments. The buckets with a longer time horizon (10+ years) will be funded with a smaller initial investment and have the potential to grow. More or less money can be placed in investments with a fixed rate of return depending on your level of comfort and available assets.
   

2. *Graphic is for illustration of time-segmented distribution strategy only. This information should not be construed as a recommendation of the investment plan for all investors. There is no guarantee that any or all segments will obtain their desired results. If desired returns are not met in any investment segment this could cause the investor to run out of income before the end of that income segment. To continue drawing income the investor may have to remove funds from other investment segments before scheduled. This action could lead to additional fees and ultimately the failure of the plan to meet the original objectives. Investors may have to adjust their income amounts to compensate for any investment segment not meeting its goal in order for the actual cash value to last the duration of that income segment.One reason to like this approach is that it incorporates multiple asset classes. While it is impossible to totally eliminate risk, this method of providing income does a good job of placing each type of risk in the proper place with the intention of not allowing the risk to effect your lifestyle.

    

   Designing and executing any new plan requires knowledge and understanding of investments so it is usually wise to work with a qualified professional.  Isn’t it worth the effort to know that you’ve done what you can to ensure that you can live to 90 or 100 without running out of money?

    

   *The length of time that each segment is designed to provide for is dependent on your age, health and available assets.

    

   Steven Fenyves is a Certified Financial Planner™ and the founder of  Valued Wealth Management Inc. in Boca Raton, Florida. He is a registered representative with Securities America, Inc. Member FINRA/SIPC and an investment advisor representative with Securities America Advisors, Inc. He can be reached at 561-392-4646 or at steven@valuedwealth.com.