A Summer Trip and Your Retirement Journey
Monday, June 4th
Summer is here and we kicked ours off by taking our kids on a trip to the East Coast. We visited Boston and New York City and Niagara Falls and some of the incredible historical sights of our country. We caught a game at Yankee stadium and we walked the Freedom Trail. It was a great trip.
On our first morning in New York City, we were also able to be at the opening of the NYSE and be on the floor during trading. There is a lot of energy and excitement on the floor and I admit, as a finance guy, I was a little geeked out being there.
If only the energy and excitement of the trading floor translated into sure bets for my clients. And if not sure bets, at least it would be nice to be able to count on good, steady gains. Sadly, this is not the case.
In a recent article on the TimeInc. website, they referenced a recent report from McKinsey and Company’s research division, noting “…investments, including those in 401(k)s and mutual funds, will gain far less than the investments from the past 30 years. This period of weak gains on U.S. bonds and equities is expected to last for 20 years.” In other words, if investment returns remain as lackluster as they currently are, the average 30-year-old will have to double his savings rate in order to match the returns of the past.
Most of our clients are a few years past thirty, but this trend of weak returns impacts them just as negatively. For example, the inability to meet return projections is one of the primary reasons so many pension funds are failing. When a pension is created, certain assumptions and projections are made regarding contributions, employee longevity, and investment returns. When returns are low, especially for an extended period of time, the pension no longer follows the assumed growth model and the fund can no longer be fully funded and the promised pension is at risk.
Additionally, when investment returns are poor, obviously retirement savings in 401(k)s, IRAs, and other savings vehicles grow slower and are at greater risk of serious impact by fees and taxes. If all that weren’t bad enough, when returns are generally low, the amount you can safely withdraw every year from these savings vehicles becomes much less that 4% and so income streams get smaller.
It’s important to evaluate your own personal retirement plan to determine how you will respond if return rates remain historically low.
- Is your pension at risk? What can you do to minimize that risk? Is your company offering a lump sum buyout? Depending on how much time you have until retirement and your immediate income needs, it can make sense to accept a buyout and put your money into a vehicle with guaranteed returns.
- Do you have enough saved in qualified accounts to provide adequate income when rates are low? What can you do to decrease fees and increase your tax efficiencies? Again, depending on your own personal retirement timeline and income needs, it may be beneficial to allocate a portion of your savings to an annuity which can provide a lifetime guaranteed income stream at a higher withdrawal rate than other vehicles.
- Can your retirement advisor see the whole picture? Do you have contingency plans for varying market conditions and unexpected changes in pension or social security forecasts? Does your plan give you confidence in any future scenario?
I recently met with a couple who had done a good job saving for their retirement, but their investment accounts were closely correlated, meaning they performed similarly in given market conditions, and the accounts were not growing very fast. One of these happened to be a variable annuity that was not only susceptible to market risk, it had multiple layers of fees. When we added all these up, they were paying 3.85% in fees every year.
Given the current low market returns and these exorbitant fees, it was not hard to see why they weren’t making any money on the account. This investment wasn’t doing them any favors; it wasn’t meeting their growth and saving needs as they prepared for retirement, nor would it meet their income needs after they stopped working. They needed a better plan and we created one.
This kind of thorough evaluation of your accounts is essential so that you can balance real-life market conditions with your personal retirement goals. While every retirement timeline and situation is different, in this age of the New Retirement, every person needs a solid plan to maximize their dollars and make them last as long as they do.
Return rates will fluctuate. Taxes will rise and fall. Markets will boom and struggle. But, with a plan in place, you can relax and be confident that you will have the money you need for as long as you need it no matter what happens.
At Acute Wealth Advisors, we love being able to provide peace of mind. We feel like we have succeeded when you sleep better. We have the tools to help you, no matter your circumstances, your portfolio size, your retirement goals, or your income needs. And we are always happy to meet with you and make a plan tailored to your specific situation. We are experts at effectively helping you navigate the “retirement red zone” so that you can transition from growing and saving your money to using and accessing it successfully throughout all the years of your retirement.