So you’re retiring at 55 or 60, you’re in excellent health, and you come from a long-lived family. We’ve got two things to say to you. The first is congratulations, and it looks like you’ll probably have a long retirement. The second is beware if it looks like you’ll have a long retirement. What should you do to make sure your money is going to outlast you?
You can't treat a 40-year retirement the same as a 15-year retirement. Doing so means your chances of running out of money are pretty good. And that’s no fun. While there’s no way to know for sure how long you’re going to live, you can look at probabilities. If you’re in good shape and your relatives have a habit of making it into their 90s, then you need to plan according. That means handling your money appropriately. (For more from this author, see: How to Determine If You Can Really Retire Early.)
You may have read articles that tell you to get conservative once you turn 60 or 65 and move your money away from stocks and equities and into fixed-income investments such as bonds and certificates of deposit. If you think you might be around for another 30 or 40 years, however, that’s probably not the right course.
Inflation Is Your Enemy
The long-term inflation rate has averaged roughly 3.24%, but it's been lower over the last decade. Let’s assume it will be higher in the next 15 to 20 years - say between 4% and 5% - as a balance. If that's the case, then relying on fixed-income vehicles to keep you going won't work.
So if for instance, you had your money invested at a ratio of 80% equities to 20% fixed income before turning 60, there’s no reason to assume you should take a different course after 60.
Steps to Take
What then, do we tell people who come in for retirement planning? First, I believe it is a good idea to get rid of your debt. If you’re about to retire, wipe out the debt before you take the plunge. If you have already retired, start eliminating your debt before you do anything else.
Then we do the math. We can’t predict the future or know exactly what will happen to your portfolio in the coming 10, 20, 30 or 40 years, but we can give you probabilities using a Monte Carlo computer analysis.
A Monte Carlo analysis will run thousands of scenarios for you and give you a clear picture of what could happen under what circumstances. I compare this as being as close to having a crystal ball as possible. Although no system is guaranteed, this is a helpful tool.
In other words, there is no simple answer. As a philosophy, we plan for extreme outcomes - in this case, that you will live longer than you have a reason to expect - just because that will put the greatest strain on your portfolio. Once we have that taken care of, you will hopefully be in a position to enjoy your retirement. (For more, see: The Pros and (Mostly) Cons of Early Retirement.)
Disclaimer: Heritage Investors, LLC, 11470 Parkside Dr Suite 201, Knoxville, TN 37934, (865) 690-1155, is registered as an investment adviser with the State of Tennessee. Heritage Investors only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.