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Guarding Your Wealth for Senior Citizens
Retirement Investing: Forget 4% Guide
Take action now to
protect your lifestyle dreams
By Jeffrey D. Voudrie, CFP
 October 4, 2006 - Do you want to reduce your
standard of living when you retire? Of course not. But if you follow
conventional financial planning ‘wisdom’ concerning retirement
investing, that’s exactly what you may have to do! Whether you are
currently retired or wanting to in the next 5 to 10 years, you must take
action now to protect your lifestyle dreams.
It’s your retirement. And if you rely on the
retirement investing advice you get from the vast majority of brokers,
insurance agents and advisors you can kiss your dreams good-bye. You
must take responsibility and control of your situation. Rest assured,
though, the solution is common sense.
When it comes to retirement investing, the
financial services industry says two things. First, that the most
effective strategy is to take no more than 4% out of your nest egg each
year. So to avoid tapping into your principal and to protect yourself
from inflation you have to earn 6-7% a year.
Second, their wisdom says that in order to reduce
your risk of loss you must shift an increasing percentage of your
portfolio out of stocks and into bonds as you near retirement. Of
course, that’s the only way they have of reducing risk…but more on that
later.
Several factors make their strategy doomed for
failure. Retirees are living longer and better than ever before.
Retirees in their 70’s are still very active and on the go. More are
living into their 90’s and even 100’s. This is good news for seniors,
but it places a much greater burden on their financial assets.
These increased life spans and active lifestyles
also correspond with a reduced savings rate. Put bluntly, today’s
retirees are entering their golden years with smaller nest eggs than
their parents had. This is due in part to the end of an era when you
could spend decades working for one company and retire with a
comfortable pension. Today’s retirees are more dependent on their own
contributions into and management of their 401(k).
A quick look at the numbers shows how much times
have changed. A couple of decades ago, $40,000 a year would allow a
retiree to live comfortably. With a life expectancy in the mid-70’s, one
would only need about $550,000 to provide that.
Even if you were able to live on that same $40,000
today (good luck!), almost $800,000 will be needed to sustain you into
your 90’s. And the percentage of people living into their 90’s is
quickly growing. That’s a 45% increase in the size of the next egg
needed.
Moreover, that assumes you use all your
principal—leaving no cushion for emergencies or inheritance for your
children. And it doesn’t take into account inflation. Realistically, you
need your income to increase each year. If you want to maintain $40,000
worth of purchasing power and not touch the principal, you would have to
have $1,000,000 AND increase your rate-of-return to 6.5%.
I bring all this up to show that it is imperative
that you earn a higher return on your money both leading up to
retirement and throughout retirement. Increasing your return during
retirement to just 8% a year drops the amount needed in your nest egg
from $1,000,000 to around $615,000. In other words, the ability to
average 8% a year will allow you to retire many, many years earlier.
The conventional wisdom of shifting your portfolio
into bonds is equally dangerous. If you have 50% of your portfolio in
safe government bonds earning 4.75% you must earn 11.25% on the rest of
the portfolio to average 8% a year. In other words, the more you reduce
your risk by investing in ‘safe’ bonds, the greater the strain you put
on the rest of your portfolio.
I don’t know about you, but I don’t want to base my
ability to live comfortably during retirement on the ability to earn
over 11% a year on stocks. But if you listen to the financial services
industry that is the gamble you are taking.
It doesn’t have to be that way. In the next
article, I will reveal the strategies and techniques that break with
conventional wisdom, but that may allow you to live a more comfortable
retirement.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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