Are you ready for a 30-year retirement?

Warren Buffet once called the babies born today “the luckiest crop in history” because they are expected to live longer and enjoy greater prosperity than any previous generation. I believe it would be a fair assumption to add that the baby-boomer generation is the “luckiest crop” of retirees to have ever lived. Today’s retirees are healthier, wealthier, happier, safer, freer, more educated, more equal, more charitable, and more technologically advanced than any previous generation.

4 Common Threats to Retirement Savings

Ironically, the wonderful advancements that current retirees are blessed with are also the root of the problems that retirees will face.  Longevity, inflation, and the retiree’s individual responsibility to manage their own investments will be the challenges that this generation of retirees will have to grapple with.

1. Longevity

Not only are we living better, we are also living longer. Therein lies the challenge: We are living too long. Life expectancies are steadily climbing. According to the Social Security Administration, a couple who is currently 65 years old have a 48% chance that one of them will live to be the age of 90.

Life Expectancy table for Age 65

Because of long life expectancies, many retirees face the very real risk that they will outlive their money if they don’t plan for a lengthy retirement. Planning on living to the average life expectancy is not enough. It is best to plan on living longer than your life expectancy, because life expectancy estimates the average time a person will live. To be certain, some people will die before their life expectancy, but some will live beyond, sometimes many years beyond, their projected life expectancy.

2. Inflation

Longevity is the catalyst for today’s retirees’ second challenge: their dollars are shrinking.

Every day, the purchasing power of the retiree is eroding as goods and services are getting more expensive. Although inflation has always existed, no previous generation has had to deal with it to the extent that today’s retiree does. Our parents and grandparents lived ten or fifteen years past retirement, inflation never had time to develop into a problem for them.

A retirement lasting thirty years or more is a game-changer. Inflation isn’t something that may happen, it will happen. In our opinion, inflation has confiscated more wealth, destroyed more retirements, and crushed more dreams than the combined effects of all stock market crashes. Historically the average inflation rate has been more than 3% annually. To put that into perspective, at a 3% inflation rate, a dollar’s worth of purchasing power today will only purchase forty-one cents worth of goods and services in thirty years from now.

Inflation poses a “stealth” threat to investors as it chips away at real savings and investment returns. The goal of every investor is to increase their long-term purchasing power. Inflation puts this goal at risk, because investment returns must match the rate of inflation just to break even. An investment that returns 2% before inflation in an environment of 3% inflation will actually lose 1% of its purchasing power. This erosion of purchasing power might seem incidental, but this type of loss, compounded over the duration of a retirement, is life-changing.

Dollars invested into money market accounts, certificates of deposits, fixed annuities, and bonds, never have, and never will, keep up with inflation. Uninformed, anxious, stock market-leery investors that depend on these types of investments for long-term growth may be insulating themselves from stock market volatility, but they are committing financial suicide, slowly but surely. To make matters worse, the paltry gains associated with these products must be taxed, which makes it that much more unlikely that they will be able to preserve purchasing power.

In the current environment of huge government budget deficits and spending, it is likely that inflation will continue to rise at least at the same pace as its historical average. Given the one-two punch of longevity and inflation, it is imperative that retirees are mindful of inflation as they invest and plan for the future.

3. Investment Management Risk

A third challenge for retirees to be aware of is the personal responsibility they now have to manage their own investments.

During the last couple of decades, a subtle transfer happened. The responsibility to provide retirement income shifted from the employers to the employees. The popular pension plans of the past, which guaranteed a lifetime of monthly income to retired employees and their spouses, are disappearing. Pensions have been replaced by 401(k)s and other similar plans that all place the burden of funding, managing, and properly distributing investments to last a lifetime, squarely on the backs of the unprepared employee. Like it or not… you, not your employer, hold the keys to your financial future.

An annual study done by DALBAR, Inc. shows that the average stock fund investor managed to capture only 60% of the return of the stock market over twenty years. Ouch! The largest contributing factor that explains this blatant underperformance was the investor’s own behavior. It appears that the typical investor followed the herd mentality, buying when stocks were high and selling in a panic when stocks were low. Seldom was the investor guided by a comprehensive investment plan. Consequently, little or no discipline was demonstrated. What is most concerning, is that for the most part, the investor failed at the easy part of investment management: the accumulation phase.

4. Retirement Income Distribution Risk

When people enter retirement, they also enter the distribution phase of investment management. In other words, they start withdrawing their investments. The distribution phase is much more difficult to manage than the accumulation phase. In the distribution phase, it is still crucial to know how to properly allocate and invest a portfolio, but additional complexity is added to the mix. Therefore, income-hungry retirees need to know how to create a distribution plan that will provide a stream of income that will last until the end of their lives. They need to create and then follow a Retirement Income Plan.

Retirees need to be kept informed in order to make the best financial decisions. It is also important to work with a financial professional that specializes in retirement issues and that is a fiduciary who puts the retiree’s best interest ahead of their own.

Are you ready to start planning your 30-year retirement? Click here to schedule a complimentary planning session to start creating your own ‘Retirement Income Plan’.

Don’t Make Retirement Investing Decisions Based on a Headline

The other day I saw a headline that read “Cancer overtaking heart disease as leading cause of death in many states”.  The headline grabbed my attention and I continued to read to see if my state was one of the states where cancer was on the rise. Upon further investigation, I found that cancer deaths per capita are lower now than at any time in recorded history. What is really happening is that with fewer smokers and healthier lifestyles, heart disease is killing fewer people thus making cancer, with the lowest death rate in history, the number one cause of death in certain states.

I don’t think there was any attempt to deceive the reader in the headline about cancer and heart disease, but I see on an almost daily basis attention grabbing headlines from the financial media that will say anything to capture the reader’s or listener’s attention no matter how deceptive their headlines might be.

CNBC ended 2018 with the following headline: “US stocks post worst year in a decade as the S&P 500 falls more than 6%”. Then my radio told me we just had the “worst December for stocks since 1930”.

These factually true, yet misleading headlines are quite shocking if historical perspective is not provided and historical perspective is never provided. Historical perspective destroys the “shock and awe effect” and frankly, shock and awe sells. Historical perspective also destroys the credibility of any person or entity that sells shocking headlines about equities to the public. So, you aren’t going to see much historical perspective from the financial media any time soon.

Let’s put some historical perspective with those truthful yet misleading headlines. Money invested into the S&P 500 at the beginning of 2018 would have lost 6% for the year but a prudent investor would not invest short term money (one year) into a long-term investment such as equities.

What would be the current value of $10,000 if it were invested into the S&P five years ago or in December of 2013? Today’s value would be worth $14,894 or an annualized return of 7.4%.

How about $10,000 invested ten years ago or in December of 2008? That $10,000 would have grown to $32,771 today representing an annualized return of 12.6% for the decade.

How about investing over a long period, say since the end of WWII? $10,000 invested into the S&P 500 since May of 1945 would be worth more than $18 million averaging an annualized return of 10.76% per year.

What is the moral of this story? Ignore the shocking short-term headlines when it comes to your long-term investments.

Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also literally wrote the book on retirement income, Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.

If you are getting close to retirement and will have at least $500,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!