You May Be Too Conservative

You may be in danger of running out of money and not even realize it. Investing conservatively today might actually jeopardize your lifestyle tomorrow. Read on to see what I mean and how you can tell if your retirement comfort is in danger. Traditional financial planning ‘wisdom’ says that as you get older you should become more conservative with your investments. The profession equates ‘more conservative’ with owning more fixed investments such as bonds or certificates of deposit. The rule of thumb is that you should have your age in bonds—if you are 50 years old, you should have 50% of your portfolio in bonds. But conventional wisdom ignores the fact that life expectancies are rising dramatically. Longevity places a tremendous burden on our investment portfolios. Think about it. You may end up living off of your nest egg for a longer period of time than it took you to save it. Conventional wisdom also says that you will probably only need 70% of your pre-retirement income to live off of. But very few retirees choose to reduce their standard of living. The bottom line is that you probably need to earn more than you think. Let me give you an example. Let’s say you set aside one million dollars to fund your retirement. It sounds like a lot of money, but a million dollars doesn’t buy what it used to! Let’s also assume that you need $50,000 a year off of your investments to supplement your Social Security income. That’s sounds like it should be really easy. All you have to do is earn 5% and you will make enough to take out $50,000 a year. So why not put the majority of your portfolio in conservative investments? The reason is because you must earn much more then 5% a year if you want to maintain the same purchasing power. The amount of money we withdraw may be the same, but it will buy less and less. The historical rate of inflation is around 2.5% - 3% a year. If we need $50,000 this year, we will need $51,500 next year to live the same lifestyle. We’ll need $53,045 the year after that. In ten years that amount climbs to $65,239. Twenty years down the road—still well within the life expectancy of the 60-year old retiree, $87,675 will be needed. After 30 years you will need a staggering $117,828 to buy the same things that $50,000 buys today. If all you earn each year is 5%, you will start spending principal the second year! Each year you will have to use more and more of your original investment to maintain the same lifestyle. The entire one million dollars will be gone in 26 years. To maintain your lifestyle and the one million dollar original investment, the portfolio will need to average about 7% per year. That’s about 40% more each year than what conventional wisdom tells you! Here’s the problem most retirees face. You need to earn more, but that will require you to invest more in real estate and equities. The fear of losing money keeps many from pursuing the rate of return they need. The brokerage industry’s answer to this problem is that you just need to relax. If the market goes down, just hang in there—it will come back. That’s crazy. The insurance industry’s answer is to buy an annuity. They suggest equity-indexed annuities or variable annuities with lifetime income benefits. Unfortunately, these ‘benefits’ are often more illusion then reality and require you to lock up your money for years. It’s ridiculous. You don’t have to lose control of your money or place all of it at risk in order to pursue higher returns. It may take time, but you can find advisors who have developed solutions. For instance, I’ve developed the Portfolio Guardian. With it, my clients are comfortable investing in ways that will earn them a higher return, because they know that the downside risk of loss is limited. And they retain complete control. Don’t put your lifestyle at risk. Find out if you are investing too conservatively so you can make adjustments before it’s too late. I’ve created a simple spreadsheet that will allow you to see how much you need to earn. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’ to request your copy. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.