Claim: “You’ll need 60-80% of your income in retirement”
The truth: Any time I hear this statistic the hair on my neck stands up. Obviously, whoever tells you this doesn’t spend much time working with retirees. The reality is that in the first few years of retirement you may need well over 100%. If you think about it, you finally have time to do all of the things you wanted to do like travel, dine out, etc. After a few years, this number tends to drop to about 90-100% for a few years, then it drops off to about 80% once the excitement of retirement has worn off. Over time, those costs start to creep back up with inflation and medical costs.
Claim: “You can spend 4-5% of your assets and never run out of money”
The Truth: Ideal spending rates rely very heavily on how your assets are invested, current inflation rates, and most importantly, your sequence of returns!
Claim: “You should be more conservative”
The Truth: I’m not sure how you define that. How much more conservative you should be depends on a variety of factors. How long will you be retired? While that might have been good advice 40 years ago when life expectancies were much shorter, retirement today can last 35-40 years! What risk are you trying to minimize? Market risk? What about interest rate risk? Or sequence of return risk?
Claim: “You have a pension so you don’t need to save a lot for retirement”
The Truth: Pension shortfalls are at record levels and a 55-year-old in 2019 is only guaranteed by the Pension Benefit Guaranty Corp. (PBGC) a maximum of $2,523.58 per month. For a 60 year old it’s $3,645.17
Claim: “I don’t need to change my strategy just because I retired”
The Truth: Just because “being more conservative” may not be the answer, doesn’t mean that you don’t need to change your strategy. Investing in retirement is completely different than investing for retirement.
Claim: “I just need a better rate of return”
The Truth: Rate of return in retirement is not nearly as important as sequence of return, which is the order in which you get the returns. Losing money in your portfolio in the first few years of retirement can have a profound effect on the sustainability of your retirement income. In my opinion, sequence of return risk may be the biggest risk retirees face!
Claim: “You should hang on to investments that have made you a lot of money”
The Truth: You should never have an emotional attachment to an investment. I have so many people come into my office with a portfolio of stocks they inherited and refuse to sell because “my dad knew a lot about investing and he made a lot of money with them.” I always use the example of a CD. A CD was a good idea 20 years ago, heck, 10 years ago, but it certainly isn’t paying the same rates today as it was back then.
The reality is that retirement looks different for everyone. In 20+ years I’ve never met 2 retirees with the exact same needs. Don’t follow “guidelines”; figure out what’s best for you and make a plan that fits you best.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or firstname.lastname@example.org.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.