People approaching retirement face a new set of unique challenges, some of which many people never think of or address until the last minute or when it is too late.
Financial planning in retirement is far different than it was just 50 years ago. At that time life expectancy was far shorter than it is today. Defined benefit plans and social security often replaced a significant part of one’s pre-retirement income. In addition, a little nest egg conservatively positioned provided for the unexpected.
Today we have experienced the perfect storm for people approaching and in retirement. The stock market has experienced two major downturns of approximately 50% over the last 15 years. This has caused many people to panic and move investments to money markets paying close to 0% interest. Interest rates on conservatively positioned nest eggs are at historic lows. Couple this with longevity risk and you have a dangerous terrain to maneuver. If you take an average 67 year old couple, there is a 50% chance one of them will be alive at age 92!
Most people want to eliminate as much uncertainty and risk from their financial lives and be sure that they will not run out of money in retirement. They also want to be sure that they have a backup for the unexpected and will not be a burden on their children.
Most people underestimate what they will want for an income in retirement to replace their current standard of living. Retirement is not a point in time. Roofs on houses need to be replaced, appliances need to be replaced as well as cars.
Inflation does not go away in retirement. One needs a growing income for many years. For example, today’s 85 year olds are paying $.49 for a postage stamp. When they retired in 1995 at the age of 65 the cost was $.32.
Financial assets usually work best when positioned in different asset classes so that some provide potentially guaranteed income (like a pension and social security), some provide growth to offset inflation and then there is “Safety Money” available for “what-if’s” and the unexpected.
For most people it does not work to have all financial assets in guaranteed vehicles. They provide very little income in today’s environment with no possible additional growth to offset inflation.
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