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February 02, 2003 at 07:00 PM
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Would you advise your clients to swim across a river in which half of the swimmers who made the attempt drowned?
Of course not. Yet many seniors use investment and income-taking strategies that put themselves at a similar level of risk for outliving their retirement savings. This article looks at a better alternative–income annuities.
The stark reality is that four in 10 Americans over age 60 will experience poverty in their later lives, regardless of their current economic circumstances. One in two will experience near-poverty, according to a May 2001 report from AARP (“Beyond 50–A Report to the Nation On Economic Security”).
Why so many? People are living longer. Theyre not saving enough for retirement. Many are entering retirement in debt. Traditional lifetime pensions are disappearing. And many will encounter unplanned expenses and or engage in unchecked spending. These are all troubling trends facing todays retirees.
One of the biggest mistakes retirees make is to believe that the sound investment strategies used for building a retirement nest egg are also the best investment strategies once they begin taking income from their assets. Seniors who plan to rely on their assets, but who lack a long-term strategy, face a risky proposition.
Retirees might be tempted to keep their nest egg in equities. After all, stocks have historically averaged an annual return of about 10%. Keep in mind, however, this is only an average; the stock market doesnt actually return 10% each and every year.
Although equities are long-term investment tools, too much reliance on them for income can create problems. Heres why:
While dollar-cost averaging is a time-tested tool for accumulating assets, reversing the process (i.e., withdrawing income) can have a devastating effect on a stock portfolio. During a bear market like todays, retirees are sometimes forced to make up lost income by selling more stocks at the worst possible time: when values are at their lowest. For many retirees, losses incurred during down markets are often more than what can be made up during future bull markets.
Indeed, various studies that have looked at market performance for all 25-year periods between the mid-1940s and today have found that an all-stock portfolio would have only been able to maintain a 10% income stream about half the time.
