While many retirees and soon to be retirees continue to rank their No. 1 fear as outliving their money, very few financial advisors and money managers know how to address this fear head on. Creating retirement income used to be simple and straightforward by using a balanced portfolio of stocks and bonds (often called a 60/40 portfolio) and only withdrawing a reasonable 4 percent per year to supplement your social security or pension. Unfortunately, what was once investment gospel is now investment lore as the 60/40 strategy and 4 percent rule have proven to be ineffective and even dangerous.
A recent study conducted by Morningstar recently underlined the fact that a balanced portfolio is ill-equipped to resolve the fear of today’s retiree because, “a 4 percent initial real withdrawal rate [has] approximately a 50 percent probability of success over a 30-year period.” That’s a coins flip chance that you will go broke in retirement if you follow the traditional advice of a balanced portfolio and withdraw 4 percent. The lesson here is that if you’re young (20s – 40s) you need to save more, but if you’re near or in retirement (50s+) your approach to creating income needs some reconfiguring.
Fidelity and Vanguard have recently stepped into the ring with the current heavyweight champions (insurance companies) to solve this problem with the creation of “payout funds” or “income replacement funds.” Tragically these well meaning funds have failed to arouse significant interest and in Vanguards case have ended up merging all their funds into a single fund, which in the industry is the kiss of death.
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