Am I on track? That question is posed to us quite often by individuals making general inquiries. Underlying issues usually are “Do I have enough to retire comfortably?” or “Do I risk running out of money?” This week’s blog addresses aspects of these underlying questions.
In general, two main approaches are used in retirement planning
Safety First. Under this approach you figure out how to invest and withdraw enough money from your portfolio to maintain your standard of living during retirement, where you’ll concentrate on building a floor under your lifestyle, a buffer against bad times. So rather than worry about historic and prospective rates of return, focus on your needs. Match your financial resources to your necessary expenses. Once funds for basic needs are earmarked, excess funds provide greater capacity to bear stock market risk. The safety-first mindset with its emphasis on building a lifestyle floor seems a wise approach to avoid running out of money in retirement.
Probability-based approach. The probability-based approach may give the best shot at meeting all of one’s goals while leaving one vulnerable to running out of wealth. For example, a retirement plan may offer a 90% chance of success; however there also is a 10% chance for failure. The worse-case scenario in the probability-based approach is that later in retirement, the retiree ends up being forced to make substantial cuts to their spending just as their cost of healthcare is rising. A probability-based approach tends to emphasize fixed weight stock allocations of between 50-75% throughout retirement. With this, one also must consider that the low interest rates of today and high stock market valuations both suggest that we should expect lower investment returns in the future. Low interest rates make now a tough time to retire. A critique of the probability-based approach is that one never knows what’s going to happen. There is a big difference between probability and outcome; probabilities are likelihoods and very far from certainties. Risk means more things can happen than will happen.
Do Retirees Take Too Much or Too Little Risk with Their Investments? Many retirees grapple with whether they have a large enough nest egg—and many wonder whether they should be tweaking their investments to potentially boost their returns. With this issue in mind, the experts are asked do you think retirees take too much, or too little risk with their investments?
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J. Mark Nickell & Co.
Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security. J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.
