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August 03, 2003 at 08:00 PM
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The recent three-year bear market may have had only a minimal impact on the investment portfolios of older retirees who were conservatively invested. But these retirees are now facing a new set of problems planning their retirement income. The impact of inflation, the possibility of outliving their assets and the measly returns they are getting on their fixed investments are all challenges for planners who specialize in the post-retirement planning market.
Many retirees admit they are living longer than they expected, and long-term inflation is really taking its toll, says Steve Bowlds, president of Retirement Benefit Advisors, Sand Springs, Okla.
“Even though we had low inflation through the 1990s, it still has a cumulative effect. The problem retirees are facing today is that they are living much longer in retirement than they anticipated at the time they retired,” he explains.
Retirees may be spending as much as 25-30 years in retirement, so retirees that Bowlds started working with in 1979 are now in their 24th year of retirement.
“The buying power of the money they had when they retired has eroded to purchase probably 60% of what it could buy back then,” he says.
Furthermore, the downturn in interest rates and yields on fixed investments is squeezing retirees who are holding on to conservative vehicles like certificates of deposit.
“Its a major concern for people in post-retirement who invest conservatively and just try to live off interest,” says Joseph T. Molony, a financial representative of the Northwestern Mutual Financial Network, Lancaster, Pa.
Molony recommends that younger retirees create a balanced portfolio that will generate the income they need for a long retirement. He suggests an “ideal portfolio allocation,” which is a function of the assets available for investment.
For example, when working with a client who may have $2 million of investable assets to work with, if they only need $100,000 a year through retirement, their portfolio only needs to generate a 5% annual return. “Their risk tolerance only has to be as high as necessary to sustain their standard of living given the amount of invested funds they have available,” says Molony.
But older retirees who have a lot of money invested in CDs have seen returns drop to as low as 1%, says Robert A. Kaiser, president of Kaiser Financial Group, Fanwood, N.J. “The CD money has really hurt senior retirees.”
A strategy Kaiser has recommended to retirees who are looking to increase their income generated by CDs is to use two insurance products–a life annuity and life insurance.
An 80-year-old client of Kaiser had a CD that was generating income of just over 1%. By moving this money into an immediate annuity with lifetime income, her annual income increased to about 10%. “The yield on that is very high,” he says.
Of course, the problem with a lifetime annuity is upon death there are no proceeds payable to heirs, Kaiser explains. If his client passed away in the next couple years, Kaiser knows he would have some very angry heirs to deal with.
