Planning for Uncertainty in Retirement

Retirement income planning becomes much easier if you know the day you’re going to die. Take your assets, subtract your legacy wishes, divide by the 15.37 years you have left, factor in a modest growth rate, and voilà – you have your annual income.

But we all know life doesn’t work like that. We deal with uncertainty at home, at work, and the retirement income our investments support.

Will I be able to retire on my terms?

The median age most workers expect to retire is age 65. In fact, 68 percent of workers expect to retire after age 65. Yet, only 25 percent of workers actually will make it to  age 65 as the average retirement age now stands at 62. Overwhelmingly, early retirements are brought about by health problems, disability, or the need to stop work to care for a spouse.

How long might I live?

In 1900, the average life expectancy for men was 58 and 62 for women. Today, however, the average 65-year-old couple has a 47 percent chance that one of them will live past age 90. Twenty-five years is just shy of the average working career. To ask our assets to provide a long, leisurely retirement is a new concept in American history.

Will my investments outlive me?

This depends on factors both within your control and without. For instance, we do have control of what we spend from our investments. Most studies would agree that “safe” portfolio withdrawal rates fall between 4 to 5 percent of the portfolio value. However, we have no control of what will happen in the capital markets in the next year or two. I often see investors and pre-retirees assuming they will earn exactly 7.00 percent per year with uncanny precision. The only thing I can guarantee about your retirement is that you won’t hit your return expectation to the hundredth of a percent! The pattern of investment returns in retirement matters a lot, as we’ve seen in the past 15 years.

How Financial Planning Could Work For You

Financial planning is about understanding these uncertainties and planning for them. To borrow a phrase, a retirement plan that is unsinkable unless it gets hit by an iceberg isn’t really unsinkable. And it really isn’t a plan. It’s more like a bet. The term “risk tolerance” is often used to describe our sensitivity to changes in our portfolio value, but for the retiree, the real risk is running out of money at the end of his or her life.

Working with a financial planner, you can begin to explore how different decisions might affect your retirement. Some questions financial planners can help you answer are:

  • How much should I be saving today to retire when I want?
  • What happens to my retirement plan if I retire at 61 instead of 64?
  • What if I take Social Security at 68 instead of 63?
  • What if I work part-time for three years during retirement?
  • What if I take more risk with my investments?
  • What happens if my stock options decline in value before exercise?
  • What happens if my underfunded pension becomes unfunded?

Perhaps you’ll find confirmation of what you already expected, but you may be surprised by the answers.  Competent financial planners can help you address these variables and quantify the effects on your retirement. Ultimately, you’ll be armed with information that can help you make decisions today about how to shore up weak areas in your retirement plan.

Securities offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Investment Partners LTD is a Registered Investment Adviser. Advisory services and fixed insurance products and services offered by Investment Partners LTD are separate and unrelated to Commonwealth. Investment Partners, LTD is located at 5775 Perimeter Drive, Suite 230, Dublin, Ohio, 43017, 614-761-9087.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 6/18/2014.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.