When we sit down with someone nearing retirement, we address what we refer to as “the essential problem” which is ensuring they do not run out of money before they run out of life. For the average 62 year old couple who does not smoke, at least one spouse will live to the age of 92. That means you need to plan for at least a thirty year retirement. This is one instance where being above average literally doesn’t pay. Every additional year that you live the cost of everything you need to buy increases. But that doesn’t mean you need to put Dr. Kevorkian on your speed dial or hope that you don’t live to be 100.
Given these facts, your retirement goal should be to safely draw an income from your investments that will rise through time at a pace equal to these increasing costs. This will allow you to maintain your lifestyle and sustain your dignity and independence during your retirement.
Sounds easy enough, right? Unfortunately, as the name implies, a fixed income strategy will not work. This includes investing exclusively in things such as bonds, cash, CD’s and fixed annuities. If you invest only in fixed income, the problem is not if you will run out of money but when will you run out of money.
The only asset classes that have always kept up with rising living costs over a 30 year period are equities – small and large companies both in the United States and abroad. There was a 48-year stretch from 1941 -1989 where Long Term Government Bonds did not keep up with inflation, while the S&P 500 outpaced inflation by 7.1% annually.
But, knowing where to invest your money won’t necessarily make you a successful investor. Staying disciplined will. If history is any guide, nearly 4 years in 5, the values of the great companies in America and the world will go up; at least once every 5 years, they will temporarily go down and scare nearly everyone out of them.
The easy part of our job is helping you to pick the best mix of stocks and bonds to meet your lifelong income needs. However, where we provide the most value to our clients is not predicting the direction of the economy or the stock market, but keeping them from panicking when the next bear market arrives.
Christine L. Carleton, CFP®