Planning & Investment Strategies for Retirement

BUILD A SOUND INVESTMENT STRATEGY FOR RETIREMENT

What is your strategy to pay for retirement?
When approaching the retirement years, certain questions take on paramount importance.
How long should we expect retirement to last?
How can we potentially determine what this new phase of life may cost?
What sources of income do we anticipate having?
What investment strategies can help us pursue the goals we have for our retirement?

How long should we expect retirement to last?

Over the last century, life expectancy has risen dramatically in the U.S. In 1900, the average life expectancy was 49.2 years. Americans had a much higher life expectancy of 78.6 years in 2017, according to the most recent statistics available.

The current retirement age of 65 years was established in the late 1800s and was based, at least in part, on the fact that the average person lived 15 years fewer than that. With all the advances in technology and medicine, it’s possible that many of today’s retirees may live much longer than their ancestors.

One out of three males and one out of two females in their fifties today will live to age 90.

How can we potentially determine what this new phase of life may cost?

You’ve probably seen projections that estimate anywhere from 60% to 90% of your current income may be needed as your retirement income. But this approach, while simple, may give you an unrealistic idea of what you potentially might need. Instead, look at your current expenses and decide which of those are expected to remain after you retire.

It’s important to be realistic about your “basic needs.“ You might not think of listing things like pet care, yard maintenance, and regular visits to salons or spas. But if you enjoy those services now, you may want them during retirement, and you might find that you underestimated the real cost of maintaining your desired lifestyle. In addition, gifts to children and grandchildren — as well as financial help for these dependents — may represent an expenditure during retirement years. All of these “basic needs“ should be accounted for in advance. 

Remember, even though you enter a new phase of life, you remain the same person!

In addition, make a realistic assessment of your activities during retirement. What goals or hobbies do you intend to pursue, and how expensive do you anticipate they will be?

Finally, many of us have special circumstances that may require additional resources during retirement, and these must be factored in.

Once you have estimated the income you may need in retirement, you can estimate the cost of the retirement you want.


The next step is to account for other income sources, such as Social Security, IRAs, and any qualified retirement plans. To estimate how much each may potentially provide, take a look at your most recent statement.

With these numbers in hand, estimating any shortfall you may have is a matter of subtraction. That is, subtract the income you anticipate from your estimate from the income you may need in order to maintain the lifestyle you want.

You may want to account for economic factors that can impact your retirement portfolio’s performance. Also, taxes, inflation, and investment risk may have a role to play.

Keep in mind the estimates and guidelines suggested are for informational purposes only and should not be considered a substitute for a more comprehensive review.


What sources of income do you anticipate having?

Traditionally, retirement funding has been viewed as a “three-legged stool,“ implying a balance between Social Security, retirement plans, and savings and investments.

As the baby-boom generation ages, there is a potential that Social Security benefits may decrease—or the age at which an individual can collect benefits may also increase. Changes in employment may affect retirement plans. As a result, the third leg of the stool, savings and investments, may become even more important.


Social Security

Let’s take a closer look at how the long-term trend of aging may influence Social Security.

Social Security is facing a major challenge. The number of people who are expected to depend on benefits is increasing as the number of people paying into the system is decreasing. As the chart shows, the over-65 population has been increasing steadily for the past 100 years.

And that upward curve is expected to get a bit steeper now that the baby boomers are entering retirement.

In 2018, the Social Security Administration reported paying out more than it took in for the first time in decades. If no changes are made, the trust fund is expected to be completely exhausted by 2034.

For years, Congress has considered proposals to make changes to Social Security. No one’s certain what Congress may do, but one option could be to raise the age at which retirees become eligible for benefits. Another might be to reduce benefits.

Whatever the case, Social Security may not be able to provide enough to be an individual's sole source of retirement income.

Sources: U.S. Census Bureau, 2018; Social Security Administration, June 5, 2018


Retirement Plans

The second leg of that three-legged stool is retirement plans.

53% of workers today expect their employer-sponsored retirement plan to be a major source of income in retirement, but only 24% of retirees say that it is.

On the other hand, only about one-third of workers say Social Security will be a major source of income when they retire, but two-thirds of current retirees report that Social Security plays a major role in providing income for them.

Source: 2018 Retirement Confidence Survey, Employee Benefit Research Institute

If the objective is to safeguard principal, a Certificate of Deposit is one option. CDs are insured by the Federal Deposit Insurance Corp up to $250,000. Holding money in a money market fund is another approach. Money market funds are investment funds that seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Individual bonds, income-oriented mutual funds, and fixed annuities can be structured to generate a steady stream of income. Bonds have different maturities and are subject to interest-rate, credit, and inflation risk. When interest rates increase, bond prices generally will fall, which may affect a bond or a bond fund's performance. Bonds redeemed before maturity may be worth more or less than their original cost. Market conditions
 will affect the return and principal value of bonds and bond funds. Income-oriented mutual funds may be appropriate for certain types of investors. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have fees and charges associated with the contract, and a surrender charge also may apply if the contract owner elects to give up the annuity before certain time-period conditions are satisfied. The earnings component of an annuity withdrawal is taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. A surrender charge may apply if the contract owner gives up the annuity before time-period conditions are satisfied. For growth potential, individual stocks, growth-oriented mutual funds, and variable annuities may be appropriate. Individual stocks will fluctuate in value and, when sold, they may be worth more or less than the initial purchase price.

Many investors place a portion of their portfolio in a position designed to protect principal. This is a secure portion that is exposed to little market risk. Among the more common investments in this class are money market funds, Certificates of Deposit, and U.S Treasury bills, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. If a Treasury bill is sold prior to maturity, there is the opportunity for capital loss or capital gain, depending on the interest rate environment. Keeping too much of a portfolio in secure investments exposes a person to another risk: inflation. Low risk investments tend to generate low rates of return. And over some periods, low-risk, low-return investments may fail to keep pace with inflation.

Interestingly, many investors have historically moved in and out of these investments depending on the volatility of the market. Performance of the Standard & Poor’s 500 stock index, generally regarded as representative of the U.S. stock market. Beginning in October 2008, the S&P 500 experienced a steep drop that lasted through March 2009. Then stock prices began to recover.
Money kept in money market funds rises in a near mirror image of the S&P 500. As the stock market fell, investors moved more cash into money market funds. Then when the market began to recover, money market fund assets trended lower. The S&P 500 Composite Index (total return) is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. Actual results will vary.

Source: Federal Reserve Bank of St. Louis, 2018

The second investment objective for many retirees is to generate income. Among the more common income-generating investments are individual bonds, income-oriented mutual funds, and fixed annuities. When considering investments that generate income, it’s important to remember that bond prices rise and fall daily. If a bond is held to maturity, a bondholder will receive the interest payments due plus original principal, barring default by the issuer. A bond fund’s net asset value (NAV) will fluctuate with the price of the underlying bonds in the portfolio. The NAV also may fluctuate as a result of turnover activity. Bond fund shares may lose principal during a period of rising interest rates. Return of principal is not guaranteed. Generally, annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency.

Investing in mutual funds is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the fund company directly or your financial professional to obtain a prospectus, which should be read carefully before investing or sending money.
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