The Biggest Risk to Your Portfolio

"Only those who will risk going too far can possibly find out how far one can go." - T.S. Eliot

What a great quote from Mr. Eliot.  So often in life we give up too soon and it is those that keep trying and pushing that make it in the end.  I remember reading a book about John Paul Getty the oil tycoon who said that there were plenty of times in his early years when he had run out of money but he willed his team to drill just a couple more feet and suddenly oil was struck.  So do we need to risk it all to make the gains needed and is this risk really necessary?

Well the first thing to consider is the greatest risk to your portfolio which is that it is exhausted before you die.  In talking to my life insurance agent the other day she told me that it is now customary to run a life insurance table to 120 years of age, up from 100 just a few years ago.  The startling thing to me is that with all the advances in medicine life expectancies are rising dramatically and this will have a profound impact on your retirement.  If you are now expected to live more than a decade longer than you planned how would this affect your portfolio and your outlook on retirement?

Well in a simple example let's assume that you retired on $1 million (this would already place you in the top 1% of the globe) and you planned that this would last you 20 years from say 65 to 85.  Based on this and a conservative rate of return on your portfolio of 5% (you would not want to risk a dramatic loss on the portfolio at this stage in your life) you would be able to draw roughly $6,000 a month.  Now if you live in southern California that is not a lot of money so you move to the Florida or Nevada.  Now remember that this amount is set and inflation over the 20 years will erode this amount to a present day value of $3,500 a month (assuming inflation remains contained at 3%),  however medical expenses are growing at roughly 20% a year and that is what is needed most as you get old so you are hardly well off.  But now let's say that you don't die at 85 but you live to 95, rather than celebrating your longevity you will be pining over the excessive drain on your portfolio.

Well let's assume that you planned better and expected to live the extra 10 years by tacking another 10 years onto the already strained portfolio means that you will now only be able to draw $5,000 a month.  The problem is that the spending power will drop much further due to the addition of the extra decade.  So by the time you get to 95 the value of your money will have fallen to $2,000 in today's dollars.  I think that Florida will be too expensive at this stage which is why a lot of retirees are moving to Mexico, Panama and the like.  Not a happy equation but not a problem if you plan correctly.

First off you will more than likely need to work far longer than you expected.  Based on the above equation one way to change the numbers around would be to work (assuming you are capable) to 75.  In this same vain earning more money would be an obvious solution but one that is not always available however you might want to consider a part time job or moonlighting some of your skills on the side can boost the size of the portfolio considerably.  This can also be effective at bringin in some income once you retire.  This way your portfolio will have grow and you will be drawing on it for a shorter period.  Assuming that it now has grown to $1.5 million you should be fine on $8,000 a month.

The second thing to consider is taking on assisted care insurance.  If you are not insured for this I hope that you have a large net worth as a decent care program can cost north of $3,000 a month.  The other age old thought is to have a lot of kids and pass the buck over to them, but to me that is a last resort but unfortunately one that forms the backbone of a lot of people's plans.

Third is to cut expenditure and live below your means.  I don't know how many times I hear people earning excellent paychecks but they proceed to spend as much or in a lot of cases more than they earn.  This is really shooting yourself in the foot.  There is no need to keep up with the Jones' particularly if they are living beyond their means.  Now if you are earning a lot of money and can adequately afford to upgrade then by all means go ahead but borrowing money for the overseas trip or buying another flashy car just to impress the neighbors should be eliminated in order to ensure that you live a wonderfully balanced and eventful retirement.

Finally is to try to squeeze every last percent out of your investments.  You do not have to risk everything to make the investment grow but a one, two or three percent increase in your returns will go a long way to getting you to retirement.  Think about this, if I add 1% to the returns in the example above you can draw $7,000 a month up from $6,000 a month.  This is over 16% more that you can spend.  Now if you can live on say $5,000 a month you will not be drawing on your principle at all.  Take this a step further, if you earn 3% extra your investment portfolio will now grow and provide you with more than enough no matter how long you live.

So how do you increase your returns without taking on excessive risk?  Obviously taking on risk should be a last resort as investing in a basket of risky assets can leave you high and dry when they do not work out as planned and you can ill afford the effects of that when you are aged 85.  No I am talking abut taking a fine tooth comb through your entire portfolio from the cash under the mattress to the investment in a privately held business to see if there are some minor tweaks that you can do to gain that extra percent.  This is why Fixed Rate Deposits is such a powerful tool for you as you can earn an extra 3% (or more) over CDs and this will immediately assist you in reaching your goals.  And remember that retirement means a lot of things to a lot of people, to me I plan only to retire when that nest egg is so large that I can upgrade my lifestyle and believe me, with all of my plans, it is going to have to be huge.

The main point to the blog is to ensure that you are taking control of your own destiny by fixing the little things which are well within your control as these will make a difference in the years to come.  Do not get stuck on an age to retire as that could well be your undoing right from the get go.  Rather enjoy what you do so that effectively you are retired while you work!  As my golf coach used to say; "The only things you can control are the grip and the stance so make sure you get those two pieces down otherwise you have no chance at all."