Two of the most common themes among investors of any age include the fear of loss and urge for gains. These two concepts are by no means new ideas, but they often come to the surface when someone begins to consider retirement. It is, of course, natural to be concerned with the ups and downs of the market, especially when retirement means that you’ve given up your ability to earn an income and you will have to rely on your investment portfolio to take over that important task. While there are several important steps any new retiree should take in order to help strike the right balance between risk and return, I’d like to introduce what may in fact be the most significant risk factors facing today’s retiree inflation and longevity.
I once heard someone compare inflation to a heart attack. Sounds odd, right? But when you think about it, there are some very real similarities. In both cases, you rarely know it’s there, below the surface, waiting to strike. And in both cases, if you ignore it and pretend it can’t hurt you, eventually it will appear and wreak havoc on your life. If we ignore inflation, there will be some real unpleasant consequences that await us, especially in retirement. While everyone must account for some level of inflation, the retiree is often faced with expenses that are even more price sensitive than most items, such as expenses related to healthcare. So, they need be on full alert. In addition to inflation in retirement, we should also consider that we are living longer lives, and spending more years in retirement, which makes preparing for inflation more important now than it has ever been before. If you haven’t done the proper planning, retirement might not be what you envisioned. So, when you consider retirement and begin to run projections, you better plan for inflation. Also, you need to use a realistic figure like 3 percent or 4 percent. Too many people make the mistake of thinking that the current status of low inflation is going to continue into the future. It won’t. Inflation has averaged between 3 percent and 4 percent over the last century and it will average something in that range again.1 We will not see 1 percent inflation long term and anyone who doesn’t account for at least 3 percent inflation will be in a world of trouble after settling into retirement.
Another major consideration for retirees is longevity of life. We are making advances in the medical field every day and we are getting good at keeping people alive and heathier for much longer than we once envisioned possible. Longevity is becoming one of the most significant risk factors for retirees today. In the 1900s the average life expectancy was in the 50s. Today, more than half of all newborns are expected to live to age 100.2 In fact, researchers in the late 1990s concluded that, over the course of human history, the odds of living from birth to age 100 have increased from 1 in 20 million to 1 in 50!3 The fact that we are living longer and healthier lives means you better be prepared for your retirement to last several decades. And you better be prepared to have your retirement nest egg last that long too. That also means that you need to make sure your nest egg is positioned to offset the impact that inflation will have during a 20 or 30 year retirement. If we have inflation of 4 percent, you will need almost 50 percent more money every decade just to stay even!
How do you solve these major issues that almost every retiree will face? You don’t do it with fancy investment schemes that promise to double your money overnight, or with get-rich-quick strategies that promise to teach you the “secrets” of which stocks to buy and when to sell them. While those gimmicks might sound like a lot of fun, they are only that-gimmicky. They are not meant to truly help you reach your goals. The true “secret” to investment management is this…. there are no secrets! The best way to work to attain your goals includes the utilization of the time-tested, text book strategies of time (not timing in the market), asset allocation and balance and diversification for your investment portfolio. While that might not be a fancy way to grab your attention, it is the right way to structure a portfolio. You must first determine what your life goals consist of and then you must define the level of risk with which you are comfortable. After you have your goals identified and you’ve selected an appropriate risk-tolerance level, you can begin to build a portfolio using those textbook strategies that help you work towards a return that aims to stay ahead of taxes and inflation. You don’t have to earn double-digit rates of return every year. But you do need to outpace taxes and the rising cost of living.
When retiring investors grasp the impact inflation can have on a portfolio along with longevity risk, they begin to understand that they have to grow their money so they don’t outlive it. At Fragasso Financial Advisors, we help these folks to understand what they need to do in order to prepare for a long retirement. And more importantly, we help them develop and implement personalized strategies to help them work towards their life goals. This all starts with an in depth, confidential discussion that you can and should have with one of our financial advisors. If retirement is in the near future for you or a loved one, please don’t hesitate to call us. We look forward to helping you on your journey.
There is no guarantee that any strategy, including asset allocation or diversification, will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against lost.
3- NIA (National Institute on Aging) www.nia.nih.gov
4 – The bureau of Labor Statistics. www.bls.gov
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