Oct 21, 2017
Have you ever seen a video of someone jumping off a diving board into a swimming pool, but somehow end up doing a BELLY FLOP? It’s funny unless of course, it’s you, right? The same goes for retirement and income planning. It’s not so fun if you are the one that runs out of money and more and more retirees face that horrific event. But it doesn’t have to be that way! I watched a video the other day where people were asked – "How do you feel about money right now?” Some of the answers were: • Terrified • Hopeless • Stressed • Worried • Overwhelmed • Scared • Confused Sound familiar? PENSION A generation ago people stayed had one job during their working years. Today we change jobs often, I remember hearing that it’s as much as every 5 years for a lot of people. Back in the day, many companies offered a pension to its employees. Like the dinosaur, pensions are becoming extinct. For those of you who don’t even hear the term “pension”, this was a guaranteed income for life when you retired. The payout amount was based on your tenure and salary. Most of the pensions still left are government jobs and even those are being reduced or eliminated. The problem is pensions became extremely costly to the employer and the burden and risk and performance was ALL on the employer as well. Retirees began to live longer and funding became a huge burden for the employer. There are many underfunded plans right now, I’m sure you’ve heard the news about this. Returns in pension plans have been much lower due to the stock and bond markets not doing as well as in previous years - all these factors contributed to the dwindling of pension funds. Most of the pensions that are inexistent are not capable of meeting their obligations and sooner or later will likely have to reduce benefits. Social Security (SS) is a form of a pension. Did you know at one time SS had a high enough payout that people could actually stay above the poverty line? Not so today. There were many more workers than there were recipients. Mortality for men was only a few years after retirement and just 2 or 3 more years for women. With life spans increasing and needing to fund retirement for 25 or even 30 years, the system is stressed, to say the least. Medicare is another topic and is even worse shape than social security. Benefits will likely have to be reduced and premiums will soar. Guaranteed lifetime income is now up to you. Your employer and the government are no longer viable options to rely on during your retirement. What replaced the pension? Today the pension alternative is the 401k. This has taken the risk from the employer and put it squarely on the employee. Pensions used to be the answer to having an income you could never outlive. The 401k has no such benefit. There are no guarantees that your money will last your lifetime. In fact, there are no guarantees that your 401k will grow and not lose money either. The risk is all on you! The question is, who will sign your retirement check? How your 401k performs and the risk you take is squarely on your shoulders with no bailout if the market tanks. Remember back in 2008 how many 401k’s turned into 201k’s? Literally had their account values cut in half. Fast forward 7 years and many have recovered, but how many more cycles like that can you afford to have? If the market dropped today, can you wait another 7 years to get back to where you are today? That's 2022. I recently read a results page by Fidelity Investments regarding 401k returns for 2014. Fidelity is one of the largest mutual fund managers in the world. They manage over 1.7 trillion dollars. The article started out positive, but then they broke the real news. Even though the S&P 500 shows growth of over 11% for the year, this is what Fidelity had to say: The average 401(k) balance is up 3% from the end of Q3 and 2% year-over-year. So let me understand this. People pay substantial fees to have their mutual funds and 401ks managed by Fidelity. After you pay substantial fees and expenses and you bear all the risk Fidelity ends the year up 2%. What do you think of that? Let me tell you about two other market cycles. In 1973 there was a market drop. If you had $1000 in the market in 1973 it took until 1982 - about 9 years to have that same $1000. Could this happen again? We all hear know about the crash of 1929. If you had $1000 in the market in 1929 you waited around until 1954 for your account to be worth $1000 again. That's 25 years just to get back to where you were. I’m not a doom and gloom kind of guy, but I do follow certain economists and many of them see one of the worst market drops coming in our lifetime. Much worse than 2008 and a longer recovery period. Why? The short answer is Baby Boomers. For the same reason that the markets soared through the 80’s and 90’s will be the same reason why markets could drop, considerably – and that is the Baby Boomers! Markets are all about supply and demand. When more money is being invested into the market then is being taken out, markets go up. During the baby-boomers working years, there was an unprecedented amount of money being invested in the market. More money has been poured into retirement plans than ever before. In fact, at the end of 2012, there was over 23 Trillion in various retirement plans. Now millions of baby boomers are entering retirement. This means there will likely be more money coming out of the market rather than going in. Supply and demand say this could negatively impact the market. We have very short-term memories. Most people have already forgotten how devastating 2008 was. Statistically and historically it’s very likely some sort of correction or crash is coming. Why Do We Plan? Why do we do all this retirement planning stuff? The simple answer is we plan for income. Retirement is supposed to be our “golden years.” It’s the time you finally get to do all the things you dreamed about. Traveling, visiting grandchildren, golfing, getting together with friends, maybe buy a boat or an RV, and have some fun. Those who prepare and are ready for retirement tend to enjoy those years. Those who don’t…well, it’s not so pretty. There are two questions every retiree asks: 1. Where is my income or paycheck during retirement going to come from? 2. How long will my money last? Not knowing the answer to these two questions and not having a plan of guaranteed lifetime income will be the cause of a stressful retirement. Let me tell you a quick story – There was an older couple that decided to take a road trip across the desert from LA to Las Vegas. Have you ever driven between Los Angeles and Las Vegas? Desolate is an understatement. It can also get hot, very hot! This couple sets out on their trip in the middle of the summer. They have a nice car with all the bells and whistles. They have the radio on, the air conditioning cranked up, cushy seats and they are all set for their journey. Not long after they started, they noticed the gas tank was nearly empty. Worried they needed gas they finally saw a sign that said next gas 150 miles. Making some quick calculations and assumptions, they realized they were never going to make it to the next gas station. Now the frustration and arguing began. First, the blame game, why didn’t you fill up the car, how could you do this, why weren’t you more prepared, you knew how long the trip was going to be, and on and on. Realizing air conditioning took additional fuel mileage, they decided they’d better turn it off and put down the top on the car. That too was an argument as to whether or not there was more drag on the car with the top down and used more fuel. With the top down they began to really heat up. The sun bearing down on them, no air-conditioning, it was miserable. The arguments went on and on until finally, they ran out of gas, miles from the nearest station. This feeling of knowing you are going to run out of gas is similar to those who know they are going to run out of money in retirement or worried they might. Like this couple, they knew they were going to run out of gas, they just didn’t know exactly when, and because of that, the entire trip was miserable. • The devastation of running out of money in retirement is not a one-day event, the actual day you run out of money • It’s the anguish of weeks and years leading up to that day wondering when you are going to be out of money. Kind of like the frustration of knowing you are going to run out of gas. • It’s the pain of watching every dime you spend and not being able to do what you want to do. The golden years are no longer golden. • Then the burden you may become to your family for support if you in fact run out of money. • It’s not fun – no one wants to run out of money. Can you imagine a retirement where you had to watch every penny saving and holding on to it because you had no idea how long it needed to last? Worried about eating out, going to the movies, taking a trip, simply enjoying life. One of the questions I get asked all the time is “have we saved enough and how can we make sure our money lasts the rest of our lives?”