While waiting for a flight 10 years ago in the St. Louis airport, I picked up the book, “Who Moved My Cheese?” by Spencer Johnson. If you haven’t read it or have forgotten the particulars, here’s a very short recap; someone is messing with two mice named Sniff and Scurry and moving their cheese. Hem and Haw are the “little-people” facing the same dilemma. How each of the four reacts makes for a fun read and provides a parable.
Along these lines, I had an idea to write a book for retirees called, “Who Moved the Finish Line?” For many pre-retirees and retirees it seems as if the concept of retirement has morphed from something secure to a more nebulous and undefined stage of life.
Retirement has changed from a complete exit strategy to more of an arrangement or a process. A McKinsey & Co. study found that 42 percent of retirees balance time between work and leisure, 16 percent work part-time, 13 percent start their own businesses, 6 percent continue to work full-time, 17 percent will never work for pay again and 6 percent fall into “other.”
If financial security is a goal, how will you know recognize the finish line? What is the number that will give you financial security? A great place to start is by estimating how long you’ll live, by consulting longevity tables. Next, consider the impact of inflation on purchasing power and finally, identify income needs and sources of funds.
If you retire at 65, your life expectancy, according to the National Center for Health Statistics is 83; so you’ll be “retired” for 18 years. Fifty percent of us live beyond our life expectancy, 25 percent of men will likely live to age 92 and 25 percent of women will likely live to age 94. Plan on and prepare for 25 years or more in retirement.
Prices double every 25 years if inflation is at 3 percent and triple if inflation is 5 percent. This is why growth and income are important.
Meet Max and Deb, who retired at the end of 1988. Each had $200,000 to invest. Max thought a long-term U.S. Government bond, paying a guaranteed 9.14 percent, would do the trick. Initially, this provided “safe” annual income of $18,280. When the Treasury bond matured at the end of 2008, he found that the rate on 20 year Treasuries was 3.05 percent, which would only provide them $6,100 a year. After 20 years it takes $31,892 to buy the same amount of goods and services as $18,280 purchased 20 years earlier.
Deb was more concerned with growth. She suggested they take $10,000 as a withdrawal in 1989, representing 5 percent of their original investment. Each year, they would withdraw 5 percent of the value of their investment, no matter what that amount would be. It started out as less than Max’s $18,280, but grew substantially over time, as did her original investment. By 1998, the withdrawal was $25,008 and by 2008 it was up to $33,517, despite volatility. The principal investment had grown to $335,170, too. By investing in a portfolio of stocks, she chose to accept greater volatility, recognizing they could lose money.
Deb reinvested all dividends and capital gains and there was an initial sales charge of 2.50 percent on the initial investment of $200,000.
Performance data quoted is historical and past performance is no guarantee of future results. These hypothetical investments reflect actual historical results. Your investment experience, of course, will depend on the amount you invest and when you invest. Treasury bonds are guaranteed by the U.S. government; fund shares are not. This illustration is given to show the dramatic effect of growth on a portfolio in the long-run and the importance of staying ahead of inflation.
Income Needs & Sources
Retirement planning isn’t a spectator sport; it’s a contact sport. Be sure to determine income needs and identify retirement assets. Where are your retirement income sources, how are they titled and how are they invested? Include employer-provided plans with current and/or previous employers and Individual Retirement Plans, such as IRAs, SEPs, SIMPLEs or Roth IRAs.
If you feel like the finish line has been moved, it may be the time to revisit your retirement strategy. While we’re “reflating” the economy, it’s important to remember the long-term function of growth in your portfolio.
Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, and 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 please contact Darcie Guerin via e-mail at Darcie.Guerin@RaymondJames.com. Phone 389-1041, toll free (866) 343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.