Talk to an Adviser About Your Retirement
Creating a comprehensive retirement plan can be challenging, but you don’t have to do it alone. Please give us a call at 1 (888) 823-9566 or contact us online.
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While it may seem simple, your retirement plan is one of the most important strategies you’ll develop over the course of your life. Done properly, it’s a key ingredient to enjoying your sunset years without financial worries. Done poorly, it may result in a significantly lower quality of life after your earning years.
When dealing with a decision this serious, it’s no surprise that many turn to a variety of financial advisers to help. It’s easy to find recommendations on what types of accounts, stocks, bonds, annuities and any number of other investment vehicles are right for a retirement plan based on your gender, age, marital status, bank-account size or other personal information. But are those sources really where should you turn if they’re basing their recommendations on the group you’re in, rather than what you care about?
At Fisher Investments, we believe a realistic retirement plan shouldn’t be based on what you are, but rather who you are. That’s why we ask our clients to answer the following questions before making investment recommendations:
In our view, the most important step in successful retirement planning is establishing an end goal. Everyone’s specific goals are unique. But from a broader financial perspective, most retirement goals fit into a few key categories:
Your goals may be easily covered in one of these groups, incorporate features from several, or even change as your retirement matures. What’s important is that your retirement plan is designed and able to move in the direction that matters to you. This is one reason communication is crucial for retirement advisers, and why our Investment Counselors are dedicated to educating clients extensively during the new-client process. By helping to ensure portfolio evaluations focus on your specific objectives and regularly checking that your portfolio continues to match your evolving goals, our team provides the reliable support and clear communication to provide the peace of mind that your retirement strategy is sound.
The next critical step in constructing your realistic retirement plan is figuring out how long your assets need to last—otherwise known as your investment time horizon. Often, people assume this is going to be their life expectancy, but we’ve found this can be too narrow. For example, those with a spouse may find that a retirement plan based only on their own time horizon leaves their partner at risk, particularly if that spouse is younger or is likely to live longer.
To illustrate, Exhibit 1 shows the Social Security Administration’s life expectancies for Americans based on current age. No one wants to be poor later in life because they didn’t think they would still be alive, or leave a partner in this situation. To this end, it’s important to make your retirement plan match the longest realistic time horizon you’re likely to face. Our team’s experience working with thousands of clients has provided us insights into many of the issues investors overlook when considering time horizons, so we can help you avoid overlooking important considerations that may impact how long your nest egg will need to last.
Exhibit 1: If You’re 65 Today, the Probability of Living to a Specific Age (or Beyond)
Source: Social Security Administration, Period Life Table 2013
Your investment time horizon doesn’t only affect how much you need to save for retirement. It’s also important that your retirement plan account for how distributions (think: the money you take out of your portfolio to pay for things) and inflation impact your portfolio once you retire. In our experience, it’s easy to misjudge how much distributions can affect the long-term health of your investments and how much inflation affects their value.
For example, some believe that withdrawing 10% a year won’t draw down principal as equities have historically delivered roughly 10% annualized returns*—a common, but incorrect, assumption that the average is the norm. Though markets may annualize about 10% over time, returns vary greatly from year to year. Making the same withdrawals during market downturns as upswings can substantially decrease the probability of maintaining your principal. For example, if your portfolio is down 20% and you still take a 10% distribution, you will need about a 39% gain just to get back to the initial value. Wow!
Inflation can also undermine your retirement plan, particularly if it’s heavily weighted toward fixed-income products like bonds. Inflation is insidious. It decreases purchasing power over time and erodes real savings and investment returns. But because its effects are so slow and incremental, many investors fail to include it in their retirement planning.
To get an idea of how serious this is, consider: Since 1925, inflation has averaged about 3% a year.** That may not seem high, but if that average inflation rate continues, a person who currently requires $50,000 to cover annual living expenses would need nearly $90,000 in 20 years and about $120,000 in 30 years just to maintain the same purchasing power.
Source: FactSet, as of 03/08/2016. Assumes average annualized historical inflation of 2.90%.
Underestimating the impact of cash withdrawals and inflation is a common oversight investors make when creating their retirement plans, and it can undermine the time horizons their portfolios are able to reach. It can also be difficult for retirees to counter these effects when heavily weighted in fixed-income products, as they’ll have to absorb the costs of trading fees to shift into higher-growth investments capable of making up the lost ground. This is one reason we take a different view compared to many firms when it comes to asset allocation and advise our clients on how underperformance can also be a risk to their long-term goals.A comprehensive retirement plan will also consider your various sources of potential income in retirement. How much money you’ll continue to earn can make certain investments more or less attractive, depending on their tax exposure or required minimum distributions. Common categories of non-investment income to consider when planning for retirement include:
The difference between your total income and your total expenses is your net savings. Easy, right? If your net savings is a negative number, your portfolio will have to generate enough monthly cash flow to cover the difference or it will start to shrink. We are careful to account for this factor when advising clients about their retirement plans, as it can dramatically affect which vehicles offer the best benefits.
*Source: FactSet, Inc., as of 2/11/2016. Based on annualized S&P 500 Total Return Index returns from 12/31/1925-12/31/2015
**FactSet, as of 03/08/2016; from 12/31/1925 to 12/31/2015, average annualized inflation was 2.90%, based on the US BLS Consumer Price Index
***Estimate based on a 2.90% rate of inflation.
With the specifics of your retirement goals and financial situation well understood, the final step in your retirement plan is to develop an investment strategy with the best probability of helping you reach your goals. In our view, asset allocation is the single greatest determinant of portfolio returns and the likelihood of affording the retirement you want. At its core, asset allocation is what you decide to invest in. For most Fisher Investments clients, this means the mix of stocks, bonds, cash and other securities in the portfolio.
In our experience, investors instinctively want to “play it safe” and invest heavily in bonds to reduce volatility for retirement. In fact, it’s common to see target-date funds and discretionary advisers shift portfolios toward bonds as retirement approaches. We feel this may end up neglecting investors’ return needs—a common error when it comes to retirement planning. Counterintuitively, stocks actually have lower volatility (as measured by standard deviation) than bonds, over longer time periods, and higher average returns. (See Exhibit 3.)
^Standard Deviation represents the degree of fluctuations in the historical returns. The risk measure is applied to 5- and 30-year annualized returns in the above charts.
Source: Global Financial Data, as of 10/08/2015. Average rate of return from 12/31/1925 through 12/31/2014. Equity return based on Global Financial Data’s S&P 500 Total Return Index. The S&P 500 Index is a capitalization-weighted, unmanaged index that measures 500 widely held US common stocks of leading companies in leading industries, representative of the broad US equity market. Fixed income return based on Global Financial Data’s USA 10-year Government Bond Index.
However, there is no one right answer when it comes to asset allocation—only the answer that’s right for your specific retirement plan and financial situation. What’s important is having an adviser you can trust to thoroughly analyze your situation and provide a custom solution that has the highest probability of reaching your goals. If you keep your long-term goals front of mind, account for all income and expenses, and allocate your assets appropriately, you’ll increase your chances of having the retirement you’ve always wanted.
By taking this deeper approach to your retirement planning, we work to understand your unique financial situation and investment goals to build an easy-to-understand, yet comprehensive, retirement plan tailored to you.
Ultimately, realistic retirement planning is a complex process and our site can only briefly covers some of the most important factors you should consider when constructing your retirement plan. If you have further questions, we offer more in-depth coverage through our various retirement guides.
Creating a comprehensive retirement plan can be challenging, but you don’t have to do it alone. Please give us a call at 1 (888) 823-9566 or contact us online.
Contact Us