Retirement can be a confusing and questionable period in just about anyone’s life. Most of us ask when should I start Social Security? How much do I need to save? How much can I withdrawal each year before I run out of money? While these are all good questions, there is no one cookie cut answer that will fit everyone’s situation. These answers can only be answered by you and your unique situation. In many instances, it is wise to seek the advice from a fee-only financial planner to help get a better handle on these and other issues that surround our retirement years. Over the years, there have been numerous planners who have written papers on these topics, and, therefore, there are many different perspectives to be had. Again, what works for one person may not work for someone else so find a competent fee-only financial planner to get some much-needed guidance.
On a whole many planners state that when you are at retirement age or around 65 years old you should be about 50% equities and 50% bonds to draw 4% of your account down in order for it to last 30 years in retirement. This means you would have needed about $1 million saved by the time you reached this age. But in today’s environment of high bond and equity values that may not be the wisest of choices. While equities have almost doubled since the financial crisis of 2008 and 2009 bonds have languished ever since. This means that bonds are paying low-interest rates with the ten year Treasury being around 2.5% with a historical average of about 3.5%. This means as interest rates rise bondholders could lose some of their principal if they sold the lower yielding bonds on the open market. And equities are similarly priced high with the S&P 500 having a P/E of about 26 when its historical average has been about 16. This does not mean that stocks are severely overpriced or in what we call bubble territory, but a major correction could be in order. Regardless equities being priced the way they have little room for the double-digit gains we have seen since the spring of 2009.
With those thoughts in mind, it is no wonder that a portfolio that is 50/50 may not work as well for some. Now many planners think that when you enter retirement it is better to have a portfolio that is heavy in bonds near retirement and a shift towards equities as you age. While the jury is still out on this practice I am a believer that you do need more equities in your portfolio later in life due to the need for capital to appreciate as we are spending more time in retirement years. With a 50/50 portfolio split now instead of a 4% withdrawal, you are looking at more of a 3% in order to maintain your capital. This means a $1 million dollars saved would generate $30,000 and not $40,000 annually. Under these conditions, you would need $1.3 million to withdrawal the same 4% or $40,000. If the markets turn and you were heavier in bonds and switched to equities later you could preserve your capital to a degree and have more ability to withdrawal funds later in your retirement years. Regardless of where you stand on the portfolio mix I do believe it is imperative that you maintain a higher level of equities than what was once considered acceptable. One key to success here is to remain flexible even after you retire with regards to your retirement portfolio.
Another big question most people have when entering retirement is when to start collecting Social Security. People retiring now have what is considered retirement ages of between 66 and 67. While this is technically when you will receive your benefits without a reduction as you would if you elected to receive them at age 62. Once you start your benefits at age 62, you will see a reduction of about 30% from your full age of 67. But if you elect to defer the benefits until the true retirement age of 70 you will see an additional 24% in each benefit check you receive for life. Here is where you need to consider such things as family longevity and how long you expect to live past the age at which you start your benefits. But as you can see there are some serious benefits with the delay of Social Security payments.
Now another tool that people can use in their retirement planning in longevity annuities. These are annuities that you normally pay a lump sum payment in exchange for a monthly payment of funds for the remainder of your life. These annuities are some of the more simply products offered in the annuity world but can be very beneficial in their use. The more you pay in the initial payment and the later you start the payments the higher the monthly payment will be. But most of these do come with some risks as well as they tend to be tied to the interest rates being paid so right now the payments are lower than they may be in the future. But regardless, they are guaranteed not to stop prior to your death making them a hedge against running out of money prematurely.
If you need more information on retirement, Social Security, or annuities, feel free to contact me.
