“The United States invariable does the right thing, after having exhausted every other alternative.”
Sustainability is another one of those new buzzwords. The first time I heard this term was several years ago, while riding home with another financial advisor from a training session at our home office in St. Petersburg. We started talking about our families and he proudly told me about his oldest daughter’s career with Subway as the head of their sustainability programs. Her job was to minimize the company’s impact on the environment.
Since then, the term sustainability has morphed into other areas. Now, it’s applied to everything from the environment and natural resources to the sustainability of your wardrobe, or more importantly, your retirement income. Sustainability is about whether or not something will continue with a minimal long-term effect on something else, such as the environment or your retirement assets.
Yes, there is a need for more sustainable retirement income solutions. The recent economic downturn emphasizes the even greater necessity for investors to seek out stronger and more sustainable income solutions for their retirement.
Projections for many retirement plans often continue to be made using an average 8 percent annual rate of return. In the real world “safe money,” the 10-year treasury yields right now are only 3.51 percent. “Quality” stocks yield less than 2 percent and bond and money market returns are far below their historic lows. These facts impact the sustainability of your retirement income planning for the long term.
Also consider the investors who were thought to be savvy and sophisticated, who have been severely disappointed while pursuing high-risk strategies. Hopes of scoring higher returns to fund future spending have been met with drastic disappointment and the ability to meet future payout commitments may have failed.
The answers don’t change when we ask ourselves how to deal with reduced rates of return. It’s all about risk and reward. Are you willing to take more risk in hopes of a higher return, or have recent painful market events influenced your thoughts about exposing your retirement assets to risk? Higher-risk investments do, in fact, sometimes result in lower returns.
For the first time since late 1985/early 1986, the U.S. markets posted back-to-back double-digit quarterly returns. International equities outperformed U.S. equities, partly due to the declining U.S. dollar, and some investors are asking if they’ve missed the recovery.
Well, ask yourself how sustainable you think this upward trajectory is for emerging markets and international small cap. Then, think about the possibility of improving economic conditions, and you may surmise that there is room for growth for higher-quality investments such as U.S. large caps and international developed markets, which have not participated in the recovery as strongly thus far. In the U.S., REITs, mid caps and small caps have outperformed large caps in the last quarter, as well in the second quarter.
Sustainable spending is the other side of the equation as we assume more personal responsibility for funding our own retirement as a nation. Demographic developments are also placing the social security system under increasing stress. The sustainability of your desired lifestyle, after traditional income streams stop or change, requires strategic planning to maximize and enhance purchasing power in light of inflation. The “decumulation,” or distribution phase is as important as the accumulation phase when planning for a retirement lifestyle. And, don’t overlook the effects of taxes.
Sustainable spending requires realistic assumptions. Define your ideal retirement income, as well as a minimum acceptable income level. Determine the income level which you absolutely cannot fall below in order to survive without experiencing discomfort or poverty. The tough question is whether your spending strategy is sustainable and will you be able to stay ahead of what I refer to as the silent killers; inflation and taxes.
Wishful thinking won’t cut it. Start by taking a look at realistic rates of return and see if they match your risk tolerance level. Project expenses and consider your life expectancy; this way you’ll be much better equipped to achieve sustainability of your income levels. This information will set the stage for a well thought out and controlled approach for achieving favorable results.
In the decumulation phase, retirees live longer and live life more fully than any other generations. This means you’ll need an investment strategy with the potential to sustain your spending in “real” or after inflation terms, for 20 or more years. To maintain a lifestyle based on $40,000 a year, adjusted for inflation and a life expectancy of 25 years, you’d need $1 million (assuming a realistic after-tax return on a portfolio of roughly zero).
Contributions made during the accumulation phase and how they’re invested determine the actual amount available for income. Realistically, most investors have less than $1 million accumulated when they retire.
Some people are asking if they’ve missed the rally. No one can predict the future, but some asset classes have lost their attractive valuations, yet remain good long-term investments. Some segments of the markets may appear overvalued, based on current fundamentals, but with the anticipation of higher earnings growth, the markets may actually still be undervalued.
Only you and your financial advisor can decide what’s best for your particular situation, but the nature of the recent “low quality” rally makes a compelling case for the value of portfolio diversification, which may help you participate in improving markets without taking on disproportionate risk.
Darcie Guerin, financial advisor and branch manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145, provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in the Southwest Florida area for 2009. If you have questions, e-mail her at Darcie.Guerin@RaymondJames.com or call 389-1041, toll free (866) 343-0882 or visit RaymondJames.com/Darcie. Past performance may not be indicative of future results.