It is a fair assumption that the baby-boomer generation is the most fortunate group of retirees to have ever lived. Today’s retirees are healthier, wealthier, happier, safer, freer, more educated, more charitable, and more technologically advanced than any previous generation.
4 Common Threats to a Secure Retirement
Ironically, the wonderful advancements that current retirees are blessed with are also the root of the challenges that retirees will face. Longevity, inflation, the retiree’s individual responsibility to manage their investments during retirement, and then properly distribute their funds will be the issues that this generation of retirees will have to grapple with. All these issues point to the fact that retirees need a plan. Having a retirement income plan to follow will ensure that a career’s worth of accumulations are turned into a stream of inflation-adjusted income that will last throughout retirement.
1. Longevity
Not only are we living better, we are also living longer. Life expectancies are steadily climbing. According to the Social Security Administration, a couple who is currently 65 years old have a 49% chance that one of them will live to be the age of 90.
Because of long life expectancies, many retirees face the very real risk that they will outlive their money if they don’t plan for a lengthy retirement. Planning on living to the average life expectancy is not enough. It is best to plan on living longer than your life expectancy, because life expectancy estimates the average time a person will live.
2. Inflation
Longevity is the catalyst for today’s retirees’ second challenge: their purchasing power is shrinking.
Although inflation has always existed, no previous generation has had to deal with it to the extent that today’s retiree does.
A retirement lasting thirty years or more is a game-changer. Historically the average inflation rate has been more than 3% annually. At a 3% inflation rate, a dollar’s worth of purchasing power today will only purchase forty-one cents worth of goods and services thirty years from now.
Inflation poses a “stealth” threat to investors as it chips away at real savings and investment returns. The goal of every investor is to increase their long-term purchasing power. Inflation puts this goal at risk, because investment returns must match the rate of inflation just to break even. An investment that returns 2% before inflation in an environment of 3% inflation will actually lose 1% of its purchasing power. This erosion of purchasing power might seem incidental, but this type of loss, compounded over the duration of a retirement, is life changing. Inflation isn’t something that may happen, it will happen. In our opinion, inflation has confiscated more wealth, destroyed more retirements, and crushed more dreams than the combined effects of all stock market crashes.
3. Investment Management Risk
A third challenge for retirees to be aware of is the personal responsibility they now have to manage their own investments.
During the last couple of decades, a subtle transfer happened. The responsibility to provide retirement income shifted from the employers to the employees. The popular pension plans of the past, which guaranteed a lifetime of monthly income to retired employees, are disappearing. Pensions have been replaced by 401(k)s and other self-funding plans that all place the burden of saving, managing, and properly distributing investments to last a lifetime, squarely on the backs of the unprepared employee. Like it or not…retirees, not the employer, hold the keys to the retirees’ financial future.
The problem lies in the fact that we as a people are not good investors. An annual study done by DALBAR, Inc. shows that the average stock fund investor managed to capture only 60% of the return of the stock market over twenty years. Ouch! The largest contributing factor that explains this blatant underperformance was the investor’s own behavior. It appears that the typical investor followed the herd mentality: buying when stocks were high and selling in a panic when stocks were low. Seldom was the investor guided by a comprehensive investment plan.
4. Retirement Income Distribution Risk
When people enter retirement, they also enter the distribution phase of investment management. In other words, they start withdrawing their investments. The distribution phase is much more difficult to manage than the accumulation phase. In the distribution phase, it is still crucial to know how to properly allocate and invest a portfolio, but additional complexity is added to the mix. Therefore, income-hungry retirees need to know how to create a distribution plan that will provide a stream of inflation-adjusted income that will last until the end of their lives. They need to create and then follow a thoughtful retirement income plan.
The Perennial Income Model™
These four common threats to retirement savings can be mitigated by having a sound retirement income plan. The Perennial Income Model™, a retirement income plan used by hundreds of retired families across America, is a proprietary process used to manage investments during retirement. The Perennial Income Model matches current investments with future income needs to provide reliable income.
Designed to meet your goals, this investment planning tool divides your retirement income into five-year segments. Each segment is responsible for providing income for a five-year period of retirement. Therefore, each segment uses a different investment strategy to protect your income against timely risks depending on when it will be needed.
The Perennial Income Model is goal specific, provides an investment and distribution framework, coordinates all income sources to help reduce taxes, and helps you recognize and minimize risk.
Following a retirement income plan such as the Perennial Income Model provides peace of mind. With a sound retirement income plan in place, retirees don’t have to worry about the day-to-day movements of the markets and can focus on the things that truly matter most.
To learn more about the Perennial Income Model and how it can provide you with reliable retirement income, visit Petersonwealth.com.