As I write this, I am looking forward to spending the weekend with my two sons in Washington DC. Next week, I turn 55.
As a financial advisor, one of the key roles we play is to help people plan for their retirement and then assist them while they live and (hopefully) enjoy their retirement.
How much will you need to save?
What age should you begin to take Social Security?
When will you and / or your spouse be able to retire?
How much can you withdraw each year so you don’t run out of money?
For some people, how much can you live on and still leave a legacy to your children or others?
How much of our assets should be in stocks and how much allocated to fixed income?
These are all questions and issues we discuss with clients of all ages. These are some of the most important discussions and guidance that we can provide.
The future is unknown. Thus, there are many variables to deal with, most of which are undefined.
Yet, in 15 years as financial advisors and many years providing financial advice before that, we have been able to successfully provide answers to these questions which provide clarity, a sense of comfort and security to our clients.
As we discussed last week, A Formula for Investing Success, having a consistent overall investment philosophy as a firm is extremely helpful to us, and our clients, as we evaluate and provide advice to answer these questions.
Based on academic and our real world experience, a 4-5% withdrawal rate from your invested assets is considered a safe withdrawal rate. As the future is unknown, this can’t be guaranteed, but we are confident this will work over the long term for disciplined clients. This means you should not run out of money during your lifetime and hopefully, not come anywhere near that.
If you save $2 million, the safe withdrawal rate means you would be able to withdraw $100,000 per year, in addition to Social Security or other income sources you may have.
We have seen over the past 15 years, even with great stock market volatility, accounts have actually increased or remained about the same, even after annual retirement distributions. They are not rapidly declining towards zero.
We discuss these concepts with clients of all ages so we can help them determine savings plans to meet their retirement goals. If we analyze their assets, withdrawal and spending expectations and the calculated withdraw rate is much higher than 4-5% range, say a 8-10% withdraw rate, then changes would be required. You would need to work longer or part time, invest more in stocks to generate greater expected returns (and be able to emotionally deal with the greater volatility and risk), save more or spend less in the future.
For most, this is an ongoing process. Clients often want to review and discuss this many times. For some couples, one spouse is confident and the other is concerned. We encourage them to talk to us whenever their concerns arise. This is normal and expected, as their ability to live the life they desire is dependent on the outcome of these financial and lifestyle decisions.
One thing is certain, in general, is that longevity, or life expectancy, is increasing.Americans, on average, are expected to live longer than in prior generations. And joint life expectancy is increasing even more. How long do your assets need to last to provide for a meaningful life, and cover whatever health or special care you may need for yourself, and your spouse?
While we all know people who have died far too young, we must still plan for longer lives. Planning for the joint life expectancy of a couple takes priority over that of either individual in a relationship. You want to provide for both of you, knowing that one will outlive the other. You want to be comforted to know that whomever lives longer, they will be OK financially.
For someone born in 1940, who is 78 now, men are expected to live on average an additional 10 years and women an additional 12 years. The average life expectancy is to age 88 and 90, respectively. Keep in mind these are averages, meaning some will live longer and some live less. For anyone in their 50s or 60s, they should assume a life expectancy well into their 80s, and even longer.**
There is another major factor in life expectancy, which is the correlation to education. There is a link between those who are more educated, who tend to have greater incomes, eat healthier and have access to better health care than the overall population. The more educated population has longer life expectancies. Thus, we must plan so that your assets will last even longer than the statistical averages.
A major implication for us as financial advisors is to change the traditional thinking towards dramatically increasing ones asset allocation towards fixed income as someone ages. There used to be a rule of thumb that your stock allocation should be 100 – your age. If you were 60, this logic would lead to a 40% stock allocation. However, as we discussed earlier, this person could have a 30 year joint life expectancy.
Given longer life expectancies and inflation, which rarely disappears, it is important for nearly all clients to maintain a “healthy” allocation in a globally diversified portfolio of stocks. By maintaining a reasonable stock allocation, above what the old rule of thumb would recommend, you will have a much greater chance of your assets continuing to grow over the longer term, to offset the creep of inflation.
It is now common for our clients in their 70s and 80s, depending on their specific situations, to have 40-50% of their assets invested in stocks. This is reasonable because of inflation and longevity. If something costs $100 and increased 3% per year, in 30 years it would cost $243. Wow!! The only way to keep pace with inflation over the long term is to invest in stocks, with the proper guidance, counsel and education of an advisor.
As the disclaimer states, past performance is no guarantee of future results.
However, good planning along with discussions and a solid, consistent investment strategy should provide for a secure future. We can guarantee we will do our best to provide that!