"I'm living so far beyond my income that we may almost be said to be living apart."
E. E. Cummings (US Poet, 1894-1962)
Many people believe that cash is king in retirement and are concerned with the safety of principal as a priority in investing. While this is important, it's also important to consider the following: Those entering retirement today had grandparents that were alive in 1900. These folks didn't have a concept of retirement. They worked with their hands and backs, and when they couldn't work any longer, they retired, lay down and died.
Retirement, as a concept, was introduced in 1933 when a law was passed stating that, beginning in 1935, people would begin to receive monthly income checks from the government when they turned 65 years old. So, the parents of those entering retirement became more familiar with what it was all about. But, on average, they only lived about eight years into retirement.
Knowing that this was the most likely scenario, most people believed they could put their money under the mattress and have it last eight years. They might risk a CD, but cash and interest bearing investments were king.
Those entering retirement today tend to rely on their emotions when they think of investing. Yes, they think they may live a little longer, but on the whole, it's better to have your entire principal than risk it in the market.
The average retirement age for the last few years is 62. Why? The answer is simple. That's the age when people can start taking Social Security income, so they take Uncle Sam up on the offer. Yet, according to the mortality table, do you know what joint life expectancy is for a husband and wife when both are 62? It's 92. That's right, 92!
So, on average, one of them will live 30 years in retirement. Even with straight-line inflation at 3 percent, something that costs $1 today will cost $2.40 when they are 92. And what, may I ask, inflates at only 3 percent for retirees? Medication? Medical treatments? Housing? Nursing care? Yet, let's just assume a straight line of 3 percent.
So then, what is the greatest need for seniors in retirement? Income planning. You see, putting your money into CDs -- which have averaged 2.87 percent over the last five years -- will certainly not keep up with inflation when you consider taxation. So, somewhere along the line, you begin to lose ground on your standard of living. But, it's hard, because many seniors remember what their mom and dad invested in.
What's the answer, then? Is it risking principal in the stock market in order to chase 10 percent to 12 percent gains? Certainly, in the past, the market has been the place to beat inflation. In 1946, the S&P hovered around 20. Today, it's closer to 1200, or 60 times what it was 60 years ago. That is especially fantastic considering that the market has gone down 13 times in those 60 years by thirty percent or more. So, on the surface at least, the risk is worth the reward.
The only problem with this kind of thinking is what happens if the next 10, 20, 30 or 40 years are not like the last 30 years. What happens if the next 16 years are like the period between 1968 and 1982, when the market only ran up a cumulative 0.38 percent? What happens if all the bailout money and stimulus packages our government has spent and will spend causes hyper-inflation like that of the late 70s and early 80s? It has to mean something that baby boomers will be retiring in larger numbers than we have ever experienced before in the history of our country. They will certainly be taking more money out of the economy and Social Security at the same time and pace. What will it do to our economy, which is driven by spending and lower tax rates?
The answer could be a rough go of it for those in and entering into retirement. Those who can least afford to lose will be hit the hardest. So, what can a planner do? The answer is quite simple. Bridge the two worlds of safe principal with market-linked gains to a fixed indexed annuity with the ever-abundant income riders and withdrawal benefits to protect their future. The security and the potential all wrapped in this one product is absolutely perfect for those approaching and already in retirement.
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