The Biggest Need for Retirees: Income Planning
You know, that’s how a lot of our grandparents were. They didn’t really have a concept of retirement. They worked hard and when their eyes darkened, their backs weakened and their hands couldn’t grip anymore, they stopped working, sat down…and died.
The concept of retirement in America grew out of the reforms made in the great depression, one of which was Social Security. In 1933 congress passed the Social Security bill that enabled people who were age 65 to receive income checks monthly from the government starting in 1935. It was originally intended as a supplement to income for the elderly, yet has turned into the major source of income for many retirees. It is interesting to note the average retirement age in 1910 was 74 years old, and the average in 2006 was age 62. (1) This is most likely true because it is when people can begin to receive early Social Security.
It’s interesting to note according to government actuarial tables a male age 62 is expected to live to just about 80 years old. If he reaches 75 he’s expected to reach age 85, and if he reaches age 85 he’s expected to live until age 90 plus. Women of those ages (never ask though) are expected to live another year and a half to two years longer than their male counter parts. (2) We are living longer and it is definitely putting pressure on finances, both personal and for the government as well. Imagine a government trying to fund retirement for millions and millions of Boomers over the next 30-50 years. Not just Social Security, but Medicare and Medicaid are headed for real trouble.
So, your job is trying to provide enough of an asset base to last through retirement. If you are retired, your job is to make the money last through retirement. Tough job! It seems like this should be easy. You make money, you save money, and you spend it in retirement. Simple, right? Not exactly. We are talking about making money last for at least three decades. What lasts three decades anyway? Plastic water bottles? Marriage? Well, considering a divorce rate of over 50% and spouses that pass away prematurely during retirement, maybe not. These can be painful realities as we head into what is supposed to be our “Golden Years”. The water bottle outlasts our marriage and our money. Something’s not right here.
Still, life happens. And as I said, it happens for three decades on average in retirement. The highs and lows. The arthritis and dementia. The grandkids and poodles. Three decades of life all of which we have to fund. While there is so much more to enjoying retirement than money, if you screw up the money it has a dramatic impact on all the other aspects of those Golden Years. In fact, if you screw the money up you may have to go to work at the Golden Arches!
Here’s another happy thought; inflation. Inflation relates to how effective your buying power will remain for the course of your retirement. Even with straight-line inflation at figured at 3%, what costs a $1 today will cost $2.40 when the 62 year old couples last survivor reaches 90.
And what, may I ask, inflates at only 3% for retirees?
Medical treatments? Wrong!
Housing? No way!
Long Term Nursing Care? Laughable!
All of the above expenses increase at a much faster rate than 3% annually.
What is the answer? Is risking principal in the stock market to chase 10%–12 % gains the answer? Certainly, in the past the market has been the place to beat inflation. In 1950 the S&P 500 went from 17 to 23. In 2010 the S&P fluctuates between 1,000 and 1,200. (3) Yes, more than 50 times what it was 60 years ago. That is fantastic considering we have had 13 bear markets in those 60 years…dipping thirty percent or more!! So, on the surface at least, the risk is worth the reward.
What happens if the next 60 years doesn’t happen like the last 60 years? Or the next 30 years like the last 30 years, or for that matter the next 10 years? Do you have 60 years to overcome losses? Absolutely not!
What’s the answer? How do you plan for income that will last in the bearish of markets? One of the keys is knowing where you are in life. My grandfather was good at it. He was never lost, at least as far as life is concerned. When it comes to finances it’s important to realize that you are in one of two stages, accumulation or distribution.