Making Your Nest Egg Last a Lifetime – 4 Factors Which Affect the Longevity of Your Money
What keeps you up at night? Many of our clients are concerned about one thing and one thing only: Will you run out of money someday? In retirement, your goal is not only to enjoy being retired, but to stay retired. Helping you sleep well at night because you are confident your nest egg will last is our primary focus. So, what are some factors which could negatively affect the longevity of your savings?
1) Market Volatility and Risk
One concern to consider is the risk you accept in the stock market. Do you realize how much a downturn in the market could affect your retirement future? Quite a lot! It really comes down to two things: How much risk you’re accepting, and TIME. If you accept too much risk, you have the potential to jeopardize more of your life savings. And the second factor, which is mostly out of your control, is when you start drawing down from accounts in the market. If you draw down from your accounts when the market is low, it will speed up how fast your money is depleted. If the market is down 45%, like it was in 2008, and you draw down 5% from your portfolio, that’s 50% of your portfolio depleted. The markets will have to bounce back with a 100% gain in order for you to make up what you lost and bring you back to where you started. Obviously, if you started drawing in 2008-2009, that’s a downturn you can’t recover from. Considering much of the research we’ve studied, most analysts are not expecting very high returns from the market over the next few years (this is due to the slow down of quantitative easing from the Federal Reserve, the anticipation of continually rising interest rates, plus a global economic slowdown). The question you have to ask yourself is this: How much risk am I really willing to take, and how much of my money should be at risk in the first place? Many times, the answer is removing some of the risk, and diversifying among other asset classes to do so. In addition, you need a distribution specialist who can assist you in drawing down from your accounts in the most efficient way so you don’t run out.
Another concern is good ol’ Uncle Sam. If you’re like most people, you’ve probably saved in tax-deferred retirement accounts like IRAs, 401ks, 403bs, and 457 plans. As you probably know, you have yet to pay taxes on this money! Uncle Sam will have his hand out and will be asking for the first dollar out of these accounts. So, the inevitable question which surfaces is this: What if taxes go up? Our country is currently $18.9 trillion in debt. Not only that, but our unfunded future liabilities (Social Security and Medicare) make the debt ceiling add up to about $210 trillion! Wow! With the government in these financial circumstances, what do you think will happen to taxes in the future? Right! They could be going up! So, taxes may play a large part in how long your money will last, especially if you’re going to have to owe more to Uncle Sam when you plan to retire and start living off your savings.
The third factor, and just as important as the rest, is inflation. Although inflation may be low right now, we’re more concerned about how inflation will be over the next 20-30 years of your retirement. Certainly we anticipate inflation to increase, especially if the Federal Reserve is trying to manipulate the economy by raising interest rates. Inflation is a necessary part of the economic cycle. So, what happens if inflation gets higher in the future? Simply put, it means your money will not go as far. At just a 4% rate of inflation, your cost of living will double in 20 years! In other words, you will need twice as much money in 20 years just to live the same lifestyle you’re currently living. As you can tell, inflation has a HUGE role in how long your money will last. It’s important to put together a strategy that is balanced, so you still have some opportunity for growth in order to combat future inflation. We can help you with that.
4) Unforeseen Expenses
The last factor that may affect the longevity of your money is unforeseen expenses. We like to position our clients with an emergency bucket of cash for these types of scenarios, but sometimes it’s not enough. Healthcare costs especially, can very much affect how long your money lasts. It’s estimated that a couple in retirement will spend an average of $250,000 or more on healthcare. This is in excess of what your individual healthcare or Medicare supplements can cover. Remember, things like dental work and eye care can oftentimes not be covered by Medicare or supplemental coverage. Unfortunately, it’s hard to plan for these things because this is also mostly outside of our control.
In a perfect world, the stock market will go up consistently, taxes will stay the same or decrease, inflation will remain low, and you won’t need to use your money for healthcare or other unforeseen expenses. I’m an optimist, but I think you’d agree you need to have a little more realistic outlook on the future. Most likely, at least one or more of these factors will affect the longevity of your nest egg, and it’s all the more reason to sit with a fiduciary advisor who will put your needs and interests first and guide you on the right path!
Questions, comments, concerns? Feel free to contact me!
732 364 5462
At Family Focus Financial Group, Rich develops unique retirement strategies for his clients and recognizes that there is no one-size-fits-all approach. Rich is committed to developing both a custom strategy and close relationship with each client. He believes maintaining a relationship with our clients will ensure their strategy is always on course to reach their goals. Rich Feola maintains an insurance practice and the fiduciary standard of Investment Advisor Representation, a series 66 licensed registration, with Global Financial Private Capital, an SEC Registered Investment Advisory Firm.
*Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Advisor. Global Financial Private Capital and Family Focus Financial Group are not affiliated companies. Not intended for specific legal or tax advice. Any views expressed are for information purposes only and should not be construed in any way as an offer, an endorsement, or an inducement to invest or purchase insurance products.