not your parents’ retirement

Once upon a time, we worked for the same company for 40 years and retired with a gold watch at 65. We were expected to live another five years, financing this remaining time with a combination of social security and a pension from our employer. 

Well, times have changed! The average life expectancy is about 78 for men and over 81 for women. We are living longer and are much more active than previous generations. For every client I work with, I assume they will live until the age of 95 unless there is a strong argument otherwise. (One of my clients told me, based upon his parents’ longevity, he expects to live until 105!)

This long lifespan assumption begs the question, how do we invest assuming we may have 25 to 30 years ahead of us after we officially retire? This question is especially relevant, given that far fewer of us have pensions or retirement accounts that provide guaranteed income, as our parents did.

Staying employed, even on a part time basis, is certainly one strategy. Remaining in the work force provides additional perks such as mental stimulation, community, and the ability to continue to learn and grow. The emergence of today’s gig economy has created more opportunities than ever before to generate part-time income without formal employment: from driving people to their next appointment or writing someone’s white paper to starting a dog walking service, enabling us to delay the need to draw upon our retirement savings.

You do have a guaranteed income stream! Although we often don’t have guaranteed income from our employers, we do have income from the federal government in the form of Social Security benefits. My clients often don’t realize that, over their lifetime, these benefits will provide close to $1,000,000 of income!

When assuming a long lifespan, I recommend my clients put off collecting their benefits until age 70 since they increase by 8% for each year you delay collecting them beyond your full retirement age, up to age 70. For example, if you were born between 1943 and 1954, your full retirement age is 66. If you delay collecting until age 67, you would collect 108% of your monthly benefit. If you delay until age 70, you would collect 132% of your monthly benefit. Not a bad guaranteed return in a world of low interest rates!

“Don’t touch the principal” is a phrase you may have heard. It is based on the idea that you can build a portfolio of dividend paying stocks and interest paying bonds, and live off the income the portfolio generates without ever having to liquidate the actual investments. In this way, the thinking goes, you are taking less risk.

But you are actually taking on more risk when you invest for income in today’s environment – when the 10-year treasury bond yields just about 1%, and the S&P dividend yield is a bit higher at about 1.55%. Reaching for higher yields, whether on bonds or stocks, inevitably means taking on more risk.

In addition, investing in dividend paying stocks reduces the diversification of your investment portfolio, since you will tend to be concentrated in larger, slower growing companies. In turn, it’s unlikely you will be holding a true representation of opportunities around the world. And you will pay higher taxes on income generated by interest on a [taxable] bond portfolio than you will on income generated by gains from the sale of appreciated stock.

I recommend my clients focus on total return, which is a combination of income and capital appreciation. The income needed in retirement comes from maturities of stable securities such as CDs or government bonds as well as growth generated by a low cost, tax efficient, diversified equity portfolio.

Retirement may seem more uncertain than it was in our parents’ generation, but this uncertainty comes with more opportunity and more options.

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