Retirement Is All About The Planning
10,000 Baby Boomers per day are turning age 62. What does that mean? 1) They are getting old and 2) They are eligible for Social Security. Neither point is news to any of us who are “boomers.” More importantly, how have and are they preparing for retirement? It used to be the three-legged stool of Social Security, a pension, and personal savings. While Social Security will provide some of the income they are planning to live on, it is probably not enough. The plan has always been that Social Security would be one leg of the retirement income stool. The next leg was to be the pension but these are going the way of the Gooney Bird, aka gone. That being the case, it seems obvious that we are going to have to provide our own additional income through our own savings and investments. But how?
Interest at the bank is virtually non-existent. The Federal Government is paying only around 2.25% to borrow money from me for 10 years and the stock market is too scary.
So, what should I do?
Let’s ask an expert. Nick Murray has been writing about retirement and investing for retirement for years. In his numerous books and articles on the topic he makes the point rather clearly that investing in the stock market is the way. For example, if you were to turn 62 today, November 3rd, you were born on this date in 1952, any guess where the Dow Jones Industrial Average closed that afternoon? 270.23 –vs- today’s 17,000. So if your parents had put a little money away for you in the Dow, and never sold, you would have 64.34 times that amount invested toward your retirement nest egg. In other words, a $10,000 investment left in the Dow for 62 years is now worth $643,444 with no additions. OK, but that didn’t happen. What if you had graduated from college and started in 1974, the Dow was 657.23, you are now enjoying 26.43 times your initial investment. $10,000 became $264,337!
Then again, what about later in 1974 when the Dow fell to 577.60 in December and October 19, 1987 when it dropped to 1738.74? Or worse yet, how about March 9, 2009, at the bottom of the Great Recession, when the Dow hit 6547.05? All of these have turned out to be great buying opportunities, especially if you were contributing to an IRA or better yet a 401(k) with an employer match where you averaged into the market at these numerous low points. By the way, if you didn’t notice, each low was substantially higher than the previous market low I mentioned.
“How can I participate without having to lay awake at night worrying about the next crash?”
Yes, the volatility of the market drives me nuts and scares me to death. This is what annuities are for. They allow for participation in the market without the downside risk, if this is money you are planning to use for income in retirement. A variable annuity with a guaranteed withdrawal or income benefit will lock in market gains, for income, and guarantee it from that higher level, even if the market should decline, from there, for life. In effect, you are insuring your nest egg. What does it cost, is the natural next question? There is a premium like any insurance, which today will run approximately 1% for a single life payout to about 1.35% for joint life, depending on the company, the product, and the features.
The big question is, is it worth it? The answer is, tell me what the market is going to do once you begin taking withdrawals for income and I’ll let you know. The catch is, of course, is no one can predict what the market will do over the course of your retirement. If it is down substantially in the early years and you are taking withdrawals based on the original principal amount, it could be a problem. A good case in point would be the early 2000’s. If you started at a 7% withdrawal rate (5% withdrawal plus 2% in fees) on the original principal, S & P 500, and didn’t adjust for the market decline you are either out of money or darn close, due to a risk known as the sequence of returns risk. An annuity with a living benefit could still go to zero, but your income could be maintained at the original amount (i.e., $100,000 original principal 5% withdrawal = $5000 for life even if the principal goes to zero) Is it worth it? In my opinion, knowing that you can’t outlive your money is ABSOLUTELY worth it—particularly as we’ve seen company pensions go virtually extinct. Keep in mind, as with many investments, there is some degree of market risk and guarantees are only as good as the claims paying ability of the insurance company selling the product. It’s also possible to purchase an annuity but not stay within the parameters of the living and/or death benefit rider, or for an unforeseen need to cause you to violate the contact. Of course, any investment decision should be made after careful review of your individual financial situation, risk tolerance, investment objectives and time horizon.
If you would like to find out more about annuities, I’d love to discuss with you this often misunderstood financial tool.
Bill Driver
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.
Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
