50+ Lifestyles

Known or Unknown

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

New realities are-reshaping American retirement. That calls for new strategies and not just in your planning during the years leading up to your retirement. Your investment needs are different during the retirement years, due to factors known – and unknown.

What is known? – The retirement KNOWN. What factors do we know that will affect retirement?

We know that we need to plan for longer retirements. With healthcare advancements and healthier lifestyles, we’re now living longer than past generations – and retirements could potentially last 25 – 30 years or even longer. Life expectancies are much longer today. Life expectancy for women in 1945 was 68.4 years – for men life expectancy in 1945 was 62.9. Compare that with 2010. Life expectancy for women is around 80 and for men around 76. These expectancies are taken from Life Tables for the Social Security Actuarial Study no 120.

What’s the conclusion of this? A known for retirement planning is – we need to plan for longer retirements.

Another known – we know that the sequence of returns has a big impact on how long our retirement money will last. During our working lives – the accumulation phase of retirement, the sequence of market returns is not as important as long as the money remains invested. We continue to contribute….the dollar cost averaging principle applies here…..market returns as along as we are continuing to work is not as important to us BUT returns has a big impact once we retire and begin taking income from our retirement money.

Another known – we know we need to prepare for a retirement that will cost more. If we look at only two consumer goods – gasoline and groceries…..we know…..another known is that retirement will cost more. Add to those two consumer goods – the increasing cost of health care as we age…. We know we need to prepare for a retirement that will last longer.

Another known – we know that spending may not decrease in retirement. Retirees are commonly thought to reduce spending in retirement. But several surveys show that with increased costs – desire for travel and leisure time activities, often retirees do not decrease spending in retirement.
Folks these factors are what is KNOWN in retirement.

What don’t we know about retirement? Let’s identify the unknowns in retirement.

We don’t know how much longer traditional pensions plans will exist. There’s been a huge shift from employer-provided pension plans that paid retirees a steady stream of income (defined benefit plans) to the defined contribution plans. This change shifts the responsibility for ensuring lifetime income to the individual. Defined contribution plans are replacing defined benefit plans. Early baby boomers have the benefit of both …we don’t know how long this luxury will last.

We don’t know how market volatility will affect retirement savings in the future. Our IRAs, 401ks, and 403bs are all subject to the ups and downs of the stock market – and in recent times we have all seen how volatile markets are – what is the impact of this continued volatility on our defined contributions plans ? We just don’t know.

We don’t know the long-term solvency of social security. The ratio of covered workers to Social Security beneficiaries has changed significantly with fewer workers per recipient. In 1950, we had about 16 workers paying into the social security system for every 1 retired social security beneficiary. In 2005, there were a little over three workers paying into the social security system for every one retired social security beneficiary. The forecast is that by 2025 – slightly over two workers for every one retired social security beneficiary. Many proposals are being discussed to raise retirement age and to somehow change benefits.

We don’t know about our own health and longevity and the impact on spending and accumulation values.

These are the unknowns in our retirement….and consequently these are the risks we face with retirement money. Now…..having identified knowns and unknowns – what do we conclude with all this? The only logical conclusion is we need to look for a more balanced solution than previous retirees. We need more life time income…..to replace what we lost when traditional pensions are being replaced……..we need new ways to think about the need for lifetime income to replace what we lost. We need to protect our retirement savings from market downturns.

We need a flexible financial product that provides increasing lifetime income. This flexible financial product is called an “annuity.” I don’t know why they are called annuities…..I don’t know where that name came from…..but what I do know is that people like what annuities do…..people like the safety and guarantees of fixed annuities….and that safety and guarantees of fixed annuities applies to index annuities too. Value, flexibility, guarantees, growth potential is the characteristics of annuities. These characteristics are known. Call us for additional details on the annuity arrangements available.