Why many retirees might run out of money during retirement
Studies show most Americans aren’t saving enough for retirement. A recently-released World Economic Forum report warned that most retirees risk running out of money as much as a decade before death. And the anxiety of being ill-prepared for the golden years can grow when portfolios do not, leading some advisors to recommend over-weighting stocks to provide the impetus for long-term growth.
Retirement planner Nahum Daniels thinks the risk-reward trade-off of investing a retirement nest egg in stocks and bonds can result in even more worry. And, given a bad sequence of returns — coupled with the fact that people are living longer than in previous generations — many retirees could run out of money faster.
The Financial Dynamics Of Retirement
“Psychologically, we’ve grown confused about the financial dynamics of retirement,” says Daniels (www.integratedretirementadvisors.com), author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. “Since the early 1990s, when the 401(k) replaced the defined benefit plan in corporate America, there’s been a fundamental shift in perception. When retirement was pension-based, planning was about guaranteed income and the employer had to keep the promises it made. Today, participants in 401(k) plans have to know about stocks, bonds and ‘balanced portfolio’ management because they’re responsible for their own unpredictable outcomes.
“Ironically, centering a retirement portfolio on Wall Street’s securities-driven risk/return tradeoff may actually be a formula for an even more insecure retirement. The reason is the cyclical volatility inescapable in equity markets. Nor are bonds immune from losses: The Fed’s rate manipulations, coupled with our nation’s current $75 trillion debt overhang, introduces an abnormally high level of volatility to bond prices. The real crisis in retirement planning is not just our savings shortfall but our misguided mindset; we need a perceptual shift about what our real goals are and a tactical reset to reach them.”
Daniels offers four principles to reset a retirement portfolio and hedge against a market downturn:
Whether in the accumulation or spend-down phase, the retirement nest egg cannot afford market losses without eventually paying out less. “Insulate your nest egg from them and guarantee the outcome when you can,” Daniels says. “It’s unnecessary to resign yourself to self-imposed austerity to accommodate market volatility.”
“Size your nest egg as efficiently as possible by optimizing the sustainable yield it can generate,” Daniels says. “Work it back from your income need. For example, if your nest egg supports a withdrawal rate of 5 % rather than 3%, you can achieve your goal with 67% less capital.”
Daniels says the latest academic research favors the integration of actuarial science with investment expertise in the construction of a “stable-core” retirement portfolio. “Longevity insurance has a heightened economic value in an era of open-ended life expectancy,” Daniels says, “while historically no asset class beats equities for long-term growth potential. Balancing the two is key to getting the best result and hard-boiling the nest egg.”
“Today’s fixed index annuity (FIA) lends itself well as the actuarial component of a retirement nest egg,” Daniels says. “Anchoring a stable-core portfolio to it can protect against market declines while still participating in a needed share of upside potential.”
“Buying and selling securities at all the wrong times can increase the odds that you run out of money,” Daniels says. “Retirement investors need a form of protection that can keep them invested without costing so much that it devours their return in the process.”
About Nahum Daniels
Nahum Daniels (www.integratedretirementadvisors.com) is the founder and chief investment officer of Integrated Retirement Advisors, LLC. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.