“The Retirement Challenge”
THE CHALLENGE
For the first time in history, retirees are more concerned with living too long than they are about a premature passing.
Longevity is the new retirement risk.
A married couple at age 65 has a nearly 40% probability of at least one of them living to age 95 or beyond.* We are all living longer. We could live well beyond the monetary benefits of our retirement plans. It is a problem made worse when you consider the following:
(*Mouton & Company, Inc.)
Between January 1, 1988 and December 31, 2007, the Standard & Poors index
experienced an average growth rate of 11.81%, yet the average diversified mutual
fund investor earned only 3.45%. (Dalbar & Assoc QAIB 2008)
WHY?
Lack of strategy
Individuals chased performance and became integral players in momentum driven markets.
Emotions
Many investors succumbed to emotionally-based decision making driven first by greed, and then by fear.
But most of all…
The Average Return Myth.
While accumulating assets during our lifetime, AVERAGE returns are used as the measure to determine the relative progression of our portfolios. However, once we approach retirement, or more importantly, begin taking distributions from our IRAs during retirement, a different approach is required.
Most financial plans focus on AVERAGE returns, instead of ANNUALIZED returns. This is critically flawed. Doing so as you approach retirement, or begin taking income during retirement, could detrimentally affect your portfolio – causing it to be depleted significantly sooner than you anticipated.
Consider the difference between the AVERAGE and ANNUALIZED returns as reported for a widely held portfolio holding:
Initial Investment: $100,000.
| Year | Annual Returns | Market Value |
| 1997 | 74% | $174,000 |
| 1998 | 176% | $480,240 |
| 1999 | 37% | $657,292 |
| 2000 | - 81% | $125,006 |
| 2001 | - 53% | $58,753 |
| 2002 | - 75% | $14,688 |
| 2003 | 125% | $33,048 |
203% Divided by 7 years = 29% AVERAGE vs NEGATIVE ANNUALIZED return of - 15%
Clearly, ANNUALIZED returns are more reflective of the true year over year performance.
That said, the above illustrates that had you been withdrawing income from the market value based on AVERAGE returns, you would have run out of money. Unfortunately, some advisors fail to recognize the following critical point:
Investment and tax strategies used to effectively protect and distribute wealth, are inherently different than those used to accumulate wealth.
Proof of this was seen in the many retirement portfolios that failed after only one year of a declining market in 2008.
Should you wish to learn more about the unique success our clients have experienced - during a time when others have not - please call us directly at (413) 243-2654, ext. 25.