You have worked hard, planned well and accumulated a nice nest egg. However, planning and saving for retirement should not stop with your last paycheck. Retirees will find out that they need to do more financial planning, rather than less, after retirement.
While working, the focus is on accumulating enough to retire. Once retired, investments have to be continually evaluated and adjusted to make sure one does not outlive their income. In fact, recent surveys have shown that the number one fear of retirees is outliving their income. Moreover, people are living longer. These days someone who retires at age 65 can expect to live for an average of 20 or more years. There is 50-50 chance that, for a retired couple both aged 65, one of them will still be alive at age 90.
This has enormous implications for a retiree’s investment strategy. A generation ago, someone retiring at age 65 had to plan for a 10 to 15-year retirement. Nowadays, because of longer life expectancies, a retiree has to plan for a 25 to 30-year retirement. All other things being equal, this means they will need to accumulate double the retirement assets of the prior generation.
In addition, inflation does not retire when you do. Over the past 50 years, inflation has averaged over 3% a year. That may sound low, but at that rate, the cost of living will more than double over a 25-year span. In other words, by the year 2038, it will take more than $105,000 to buy the lifestyle that costs $50,000 today.
The common practice of moving all of one’s money into fixed income and other conservative investments is not the answer. In fact, there is a substantial risk of outliving one’s income with a portfolio that is substantially allocated to fixed income. Numerous academic studies employing Monte Carlo simulation have shown that the optimum allocation for retirees for a 25 to 30-year retirement should be an equity allocation of at least 40%, with reductions over time as they age.
Therefore, do not play it too safe. To plan for longevity, retirees need portions of their assets to grow.
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