If you’ve found yourself in front of a television for any amount of time, you have seen advertisements targeting people moving quickly toward retirement. One such ad suggests that a person can simply move along a path that is as easy to follow as a green line running along a sidewalk. Another commercial proposes there is a set number to save toward that will guaranty a happy, and by implication, safe retirement.
Without question, the need to prepare and plan for retirement is paramount. But, it is not as simple as following a path or calculating a fixed amount. The two primary reasons for retirement’s inherent complexity are the two most serious risks that everyone nearing retirement will face: Longevity and Sequence of Returns.
Statistically, a married couple retiring in their early-to-mid-60s need to plan for a retirement that will last between 30 and 40 years. If both are nonsmokers and free of chronic health problems (heart disease, high blood pressure, diabetes, etc.), chances are better than 50% that one spouse will live past the age of 90 and better than 25% that one spouse will reach the age of 95. These odds increase if the couple lives in an area where access to excellent medical care is readily available. A daily scan of the obituary section of any local newspaper will reveal that people are living longer than ever before.
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Additionally, online retirement readiness planning tools require the user to make an assumption for the annual rate of return on their investments. This assumption is expressed as an annual average rate of return that is linear in nature. In other words, it assumes that the long-term average, say 7.00%, is achieved each and every year. While it may be reasonable to assume that a diversified portfolio of investments can achieve an annual return of 7.00% over time, it is impossible to know in advance the sequence of annual returns that will make up the long-term average.
A person that retired in January of 2000 expecting a 7.00% average annual return faced a severe wake-up call as the S&P 500 Index entered into a 3-year period in which it declined by 10.00%, 12.00% and 22.00%, respectively. While the market has recovered from the financial crisis of 2008, the average annual return of the S&P 500 since January 1, 2000 is still below 7.00%. Complicating matters even more, online calculation and planning tools also require the same linear approach to assumptions for the rates of inflation and income taxes.
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So, can the “How much is enough?” question be answered in absolute terms? Probably not, given these and other uncertainties we face in the world today. That being said, financial advisors are equipped with the tools to help clients stress test their retirement readiness against longevity and sequence of return risks, as well as a host of other concerns. Contact our advisors at Strategic Wealth Partners if you need assistance with simplifying the complexities of your retirement.
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