Providing A Lifetime Retirement Income?

Over the holidays, my wife and I had a wonderful time visiting with family that we don't get to see very often.  It was great talking to them and catching up on the news about them and their family. During one of the conversations, we briefly discussed their retirement income and they made the following comment - "As long as we earn an average 8 to 9% return our money will last forever." It reminded me that many retired people are counting on their stockbroker to help them to outperform the stock market during their 20 or more years of retirement. And, maybe they will? But even, if they have a great broker who is able to outperform the stock market, they still run the real risk of running out of money.

 Let me explain. Over the years, I've had too many retired couples come to me asking for help because they are running out of money. For example: One of the couples retired in 1992 with a little over one million dollars. They had been taking $70,000 per year to live on and when I met them in 2003 they had less than $176,000. They were running out of money and didn't know what they were going to do? Their investment broker had assured them that they would average an 8 to 9% return on their retirement portfolio... and they had. The problem is that although they had averaged the 8 to 9% return, they didn't get that return each and every year. They had years where they made less than 8 to 9%, and years where they lost money. And, each of those years they still withdrew the $70,000 of income they needed to maintain their current life style. When you take an income from your retirement portfolio in years with low returns or losses, you are very often forced to dig into your investment principal, and you are compounding your investment losses. 

 Plus, each year they were paying management fees to their broker, whether their retirement portfolio made money or not. Consider, if you average 8 to 9%, and you pay a 2% management fee, then isn't your net average return only 6 to 7% per year?

 The final straw for them was when the stock market took the significant downturn in 2000 to 2003 and they lost over 40% of their remaining money. Because they had no way to recoup their losses and needed the income, they were forced into taking out a reverse mortgage on their home, significantly cutting back on their life style and looking to their children for help.  This is much too common a story.

 The Question Is: "Will Your Clients Run Out Of Money?"

Even after the market correction at the turn of the century, I've still been recommending that retirees get out of the stock market with the money they use to generate an income. I believe that the stock market is still overpriced! Evaluating ‘Price to Earning Ratios', ‘Dividend Yields', ‘Relative Strength' and other factors indicates that stock prices still appear to be higher than normal.

 Why Is The Market Overpriced?

There are many factors that contributed to the overvalued stock market of the 90s, such as new technology, an undervalued US dollar, declining interest rates, etc. However, one of the most dominant reasons is that in the 90's many Baby Boomers, to make up for lost time, funneled most, if not all of their retirement savings into the stock market over a very short time. This caused the stock market prices in the 90s to soar dramatically.

 In 2000-2003 we saw a significant price correction. However, because the ‘FED' kept interest rates extremely low during and after that market correction, there appeared to be no better place for these people to invest their money to get a decent return. Consequently many Boomers, finding no better investment alternatives, left their money in the stock market, which prevented the stock market from making a full correction.

 Even if you don't believe the stock market is currently overpriced, is there any question that in the next few years, we are going to have unprecedented numbers of people retiring. What's going to happen when each year more and more of these people start liquidating their investments to provide an income? When more money is being taken out of the market than is being put in, will we see a sharp decline in the stock market prices or just lack luster returns? Who knows? But, to expect an average return of 8-9% during the next 10 years or so would seem to be very unlikely and be just wishful thinking!

 What's The Best Way To Make Your Clients' Money Last?

There is no single investment or income generation strategy for retirees that will work in every situation! Every retiree's situation is different. However, for most retirees, income laddering with portion of their money, using annuities, may provide more potential for a longer sustainable income, with less risk to investment principal and no fees. There is also the new breed of annuities that are tied to a Stock Market Index, such as the S&P 500. These equity indexed annuities can provide retirees with the upside potential of the stock market, without the catastrophic downside market risks.

 There is much to consider when helping clients in their retirement years and many questions that need answers. One of the most important questions for you is: "What's more important, the amount of money your clients have invested, or the amount of income they get to spend?"