According to a recent Forbes Magazine* online article, the number one worry of retirees is outliving their money. In fact, a 2019 survey by the Aegon Center for Longevity claims that “almost half” of Americans share this worry.
With concerns about the economic outlook, the future of social security becoming increasingly uncertain, and people living longer, we will look at these concerns and how to retire with confidence.
The Retirement Dilemma
Even for those who believe that they have saved enough, the unpredictability of the stock market keeps this question high on their list of concerns. After the tumultuous 2022 returns of both the stock and bond markets, it’s easy to understand why this concern remains top of mind.
In fact, per a CNBC report** from February 23, 2023, Fidelity Investments reported that their average 401K account lost 23% last year and the average IRA was down 20%. If you factor inflation into the mix (Statista.com claims inflation averaged 8.3% for 2022), the losses were even worse.
The stock market has a history of delivering robust returns over time. For decades, it has been the primary avenue of growing wealth, making it an attractive option for long-term investments. However, the key issue is the unpredictable nature of market fluctuations, especially as one enters retirement.
Market volatility is a significant factor that can disrupt retirement plans. While the stock market has the potential for higher returns, it can also exhibit sharp drops that may erode the value of investments at a time when retirees need income. The result: retirees may be forced to sell some of their stocks when they are down, which can be disastrous.
The Uncertain Future of Social Security
Compounding the problem of volatile stock and bond markets is the uncertain fate of Social Security. Once considered a safety net for retirees, Social Security is now under strain as the aging population places more pressure on the system. This uncertainty further enhances the anxiety that many Americans feel about their financial future.
Longer Lifespans and the Retirement Challenge
Americans are living longer and mostly healthier lives than at any time in our history. In fact, perstatista.com, the average lifespan in 1950 was 67.23 years. In 2020, that age had grown to 78.81, an increase of 17%. While this is welcome news to most, it comes with the challenge of funding a longer retirement.
Investing for the Future
Adding up the challenges facing retirees: volatile markets, inflation, concerns about social security, and longer lifespans, how can one retire with confidence?
We believe the answer lies in diversification. We have designed what we call a “bucket strategy” to help people visualize this concept.
Bucket #1 is money allocated to short-term investing needs. It consists of money market funds and short-term bonds called T-Bills. As of this writing, money market funds are earning between 4.5% and 5.0%, according to Bankrate.com*****, and 3-month T-Bills are paying around 5.44% as of this writing, per Fidelity.com.
Bucket #2 would be focused on intermediate needs that are 3-5 years away. Whether it’s supplementing future income or a large purchase, these funds would be invested in a combination of short-term bonds and, perhaps, income-producing investments like dividend-paying stocks or higher-yielding bonds.
Bucket #3 Is money earmarked for longer-term income replacement and would be more allocated to stocks and long-term bonds.
Part of a financial advisor’s role is to explain the pros and cons of these different investments and help guide you to an allocation that is right for you. All investors have different needs and goals. Further, we are all unique individuals with differing risk tolerance, risk capacity, temperament, and time horizons.
The result of a proper allocation occurs when you sleep well, or relatively well, at night despite the volatility of the markets and economy.
Our team is here to help. Give us a call if you would like guidance and confidence as you face the unknowns of several decades in retirement.