The Retirees Connundrum

"The trouble with retirement is that you never get a day off." - Abe Lemons

The blog is a few days later than normal this week as I took some time off to recharge the batteries.  During this time I was able to enjoy a wonderful time with my son and I must say that looking through his eyes (he is 10) anything is possible.  On the flip side I spoke a while back to my brother who is 13 years older than me and I asked him whether with age life became less stressful and I have to say that I was not pleased with the answer.

Through my years of investing money I have never had as good an understanding about retirement and the stresses that institution brings than I do now.  Thousands of Americans are retiring on social security and not much else.  Furthermore those that are retiring on more are finding that 8 percent returns on their money is virtually impossible to achieve without taking on enormous amounts of risk which they can ill afford.  This is causing an enormous amount of stress as suddenly what looked like a good sized nest egg is suddenly meager.

When you retire your money and investments have to support you for the rest of your existence.  Now most of us that make it to retirement age will live a good long life.  While that sounds good it can be miserable if you cannot support yourself and most cannot, particularly when you factor in that the rates of return on "safe" money are pitiful and essentially non-existent.

As an example take an individual who has $1 million saved.  This is a lot even by modern standards.  Suppose that everything is paid off (no house payment, no car payment, no credit card debt) and that they want to enjoy their retirement so they budget $10,000 a month to spend.  This includes travel, eating out, playing golf, seeing friends and family and buying the odd luxury outside of food and gasoline.  If they retire at 60 and live to 90 what rate of return will they need to support this lifestyle (assuming no inflation and that they both die on the same day and have no medical expenses that are in excess of their insurance)?  Leaving nothing behind for their heirs (they spend the last dime on the last day) would require that they earn 11.63% compound annual rate of return on their $1 million portfolio.  In today's current environment that is next to impossible without taking on serious levels of risk.

So what are their alternatives?  Well first off they can retire later or they can cut back their monthly spend or both but either way they need to ratchet down the required rate of return on their investment portfolio substantially.  Given today's low interest rate environment it is imperative that people base their retirement income on rates of return around the 4 percent mark.  While this may seem ludicrously low, show me someone that is actually beating this while maintaining a safe investment portfolio.  Furthermore if the investor achieves a higher rate of return then they will have excess cash to spend on a better lifestyle or to prepare for the large medical expenditure that normally occurs in the last five years of life.

The hope is that this level of return is sufficient to beat inflation as should that rear its ugly head then the hurt is even worse, but for this blog I will not delve into that issue.  For now I will assume that inflation produces the opportunity to earn more on their savings offsetting increases in prices (a pretty wild assumption).

Retirees need to make critical decisions and they require careful thought and planning as otherwise our couple mentioned above will surely run out of money well before they die and that is a real cause for stress!  Back to our example.  If they earn 4 percent on their portfolio what can they actually spend per month?  $4,775 a month is all and remember this does not set aside anything in reserve.  Living exclusively off the interest would reduce that amount to $3,333 a month and believe me even with everything paid for that will be hard to do in southern California which is why you are seeing so many retirees moving to cheaper parts of the globe.

For those condsidering retirement soon please have a financial overview with a trusted professional and make sure that you retire on a realistic budget so that you enjoy yourselves and do not spend your nights awake worrying.  For those of us still working, I am afraid that it will probably be a while before we can even consider retirement as I for one plan to have a ball and that is going to cost me a lot of money!