Ask The CFP® Practitioner
“Go as far as you can see. When you get there – you’ll be able to see farther.”
– J.P. Morgan
Question: “How do I know if I will outlive my money?” – Julie F., Marco Island.
Answer: Most Baby Boomers, retirees and pre-retirees — especially women — wrestle at some level with the dilemma of depleting their assets. Increased longevity and economic uncertainty are valid reasons to be concerned.
The first step before you run off to one of the many lunch or dinner presentations and do something with your nest egg that you may not be able to undo, is to analyze your overall financial situation. Start by taking inventory to see how much you’ve actually accumulated, consider health issues and your family’s life expectancy history to estimate how long you think your savings will need to last, and then contemplate the rate at which you’ll spend your money.
Unfortunately, we don’t know how long we’ll live so it’s important to at least consider making even minor changes to spending patterns for your nest egg to last as long as possible. You’d be surprised how quickly savings add up if you’re conscientious and monitor cash flow in writing. Also, try to plan your expenditures and avoid impulse buying.
If you’re trying to stretch your savings, withdraw money from your IRA as deliberately and gradually as possible. Not only will this conserve the principal balance, but your IRA funds will have the opportunity to continue growing tax deferred during your retirement years. Remember that you must start taking required minimum distributions (RMDs) from traditional IRAs (but not Roth IRAs) after age 70 years, six months.
Don’t assume you’ll be able to live on the earnings from your investment portfolio for the rest of your life. You may need to draw principal at some point. If you whittle away your principal too quickly though, the likelihood of earning enough on the remaining principal to carry you through the later years declines. Review your portfolio on a regular basis with a trusted financial advisor.
Continue to grow
When investing primarily for safety, there may be a risk of not keeping up with the effects of inflation. If the rate of return on your portfolio doesn’t keep up with inflation, you’re actually losing purchasing power on your money. Typically, the allocation of your portfolio should progressively become more conservative as you grow older, but it is wise to consider maintaining at least a portion of your portfolio in growth investments. Clearly, you should invest according to your risk tolerance and other personal factors.
Back to basics
Although you’ll undoubtedly make changes to your investment portfolio as you reach retirement age, you should still bear in mind the basic rules of investing. Diversification and asset allocation remain important as you make the transition from the accumulation stage to the draw-down phase of your financial life cycle.
Simply stated the laddering technique staggers maturity dates of fixed income investments so that they mature at different times. Although we’ve experienced an unusually long period of low interest rates, they do rise and fall. Laddering investments may minimize interest rate risk because you’re investing at different times presumably at various interest rates.
A devastating health issue has the power to destroy financial plans and dramatically change lives. You may want to consider taking out a long-term care insurance policy that may cover nursing home care, home health care, adult day care, respite care and residential care. If you decide to purchase such a policy, you’ll need to choose the best time to do so depending upon insurability and age to determine your costs.
Men and Women are different
Most of us know that statistically women live longer than men live. For planning purposes, advisors make projections based on probabilities which translate to “the longer you live, the longer you will live” as the chart indicates (from Spending Flexibility and Safe Withdrawal Rates from the Journal of Financial Planning based on Social Security Administration period life table).
Another difference between women and men, according to The Financial Analysts Journal, is that women are unsure of themselves concerning investment matters. Although half of the women surveyed do share the responsibility for managing savings and investments with their partner or spouse, fewer than 1 in 10 women identified themselves as capable or confident to make those decisions alone. This group of women consistently turn to the men in their lives (fathers, sons and brothers) for guidance rather than consulting with female family members.
Research suggests that women are hard-wired with behavioral traits that can make them excellent investors. Examples of these qualities include being more realistic in their expectations, having an aversion to extreme risk and taking a longer-term view of financial planning supports this finding.
Based on the uncertainty of economic conditions, political events and health issues, confidence and knowledge are powerful forces when dealing with financial matters. Successful investors and retirees tend to possess a healthy respect for risk, maintain realistic expectations, remain flexible and regularly review short- term and long-term financial planning goals. Creating financial security for you and your family requires awareness and participation. Stay focused and invest accordingly.
This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041,firstname.lastname@example.org or www.raymondjames.com/Darcie. Please contact Darcie with any questions you would like to have answered in this column.