Many of us believe that the biggest risk in retirement is losing your money. We may feel this way possibly because we were told this by our parents. For the sake of this blog, let’s say this risk requires “defending your principal.” I don’t believe this is the biggest risk. Historically, it’s not even the most important risk. The extinction of your purchasing power is the biggest risk.
The average retirement age in America is 62, mainly due to this being the earliest age one can receive Social Security benefits. The average joint life expectancy of a 62-year-old, nonsmoking, married couple is 30 years. This means one of those two people will still be alive and needing an income at age 92. Keep in mind that because this statistic is an average, half of these couples will live longer than 92; it is not the end point for everyone.
If history is any guide, and it’s the only guide we have, your living costs will go up two and a half times during a 30-year retirement. Using the 100 year average of 3% inflation, it will cost $2.43 to buy what $1 purchases at the beginning of your retirement. Because of this, when drawing an income from an investment portfolio during retirement, your income investments need to rise as well.
The best, if not only, asset class capable of doing this is owning a brilliantly managed, well diversified portfolio of the great companies in America and in the world. Again, historically speaking, the dividend of the S&P 500 has increased substantially faster than the cost of living over time. So have the share prices but we can consider that a legacy discussion. Remember, rising income is the goal.
The downside of owning those companies is volatility. Their prices decline about 30% every five or six years. When declines happen, these companies navigate through the “apocalypse du jour” and continue growing their earnings, dividends, and eventually their share prices.
Fixed income investments do not have the ability to grow their income—hence the name. Going into 30 years of rising living costs with a fixed income investment strategy, therefore, is financial suicide.
So, you get to pick…which end of your life do you want your security on? With fixed income investments, you can have the full feeling of security at this end. But the result will be having to cut back on your lifestyle over time and extreme insecurity at the other end. When owning investments that fluctuate in price at this end, you feel the relative insecurity now while giving you the financial security you will need later in retirement.
There is likely a balance between the two main risks in retirement of defending your principal and defending your purchasing power that will allow you to sleep at night while owning the proper portfolio to reach your goals. The best way to determine this is with a comprehensive financial and retirement income plan and if I might say so, a competent, caring planner you can trust.
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The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Disclaimer: Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.