There are far more seniors living today than ever before. As a group, they are more active, healthier and more involved than any generation before. However, this longevity and active lifestyle – which most of us call “livin’” – is expensive.
In fact, with gas and food prices on the rise (AAA states that in April and May of this year the national average for a gallon of gasoline set an all time high of $3.97), Americans’ disposable income is under a nasty strain. Furthermore, the increases in medical expenses, including those involving nursing home costs, makes the gas price increases look positively skimpy. The Academy of Health states that, although 50 percent of retirees will not spend anything on long-term care during their lifetimes, 6 percent of retirees will spend at least $100,000.
Naturally, with these types of costs staring us down, it’s easy to become fearful for your money. Will your money last your lifetime or will you spend your final years broke?
Careful planning and knowing the value of diversified investing can help your chances of maintaining income for life. It is important to note that these suggestions are for entertainment and educational purposes only.
For specifics as to how our ideas work for you, please see your financial or tax advisor. So, with the ground rules established, let’s have some fun answering one of your questions:
Q: I’m afraid I’ll run out of money before I die. How can I make sure this fear doesn’t come true? Although I have no monthly pension from my job, I have managed to save about $200,000 from annual IRA contributions and a systematic payment into mutual funds. Almost all these accounts are invested in the stock market.
A: Joan, the only things that may be certain in life are death and taxes, but in the United States we can also rely on monthly government payouts in the form of Social Security. These payouts come to almost all U.S. taxpayers and serve as an efficient safety net for retired citizens.
What worries us is that almost all of your money is invested in the stock market. In order to help make sure you don’t run out of income in your lifetime, you should consider rebalancing your holdings with more bonds, or possibly 60 to 80 percent in bonds/annuities/cash and the rest in a diversified portfolio of stock mutual funds. Obviously, any mix of assets you choose will depend primarily on your risk tolerance, objectives and time horizon.
In our opinion, it is very difficult to be properly diversified in individual stocks unless you have more than $250,000 to devote to that strategy, which of course you do not have. On the other hand, each mutual fund often invests in more than 100 stocks, so you will be better positioned in a larger number of holdings.
Once you have made provisions by rebalancing, you should then put yourself on a strict budget of spending no more than 5 percent ($10,000) of your original $200,000. Hopefully your account can earn at least that much so that your principal does not go down.
If after exploring this stock/bond strategy you still feel uncomfortable with the possibility of running out of money, you may want to consider an immediate annuity, which guarantees you a monthly income for the rest of your life. These products are not government insured, but are relatively safe and can guarantee you a check you cannot outlive.
Keep in mind that one of the negatives of most of these annuities is that they do not keep pace with inflation. In addition, guarantees are based on the claims-paying ability of the issuing company.
Best of luck, and remember that you should review your plan at least annually to make sure your goals, needs and portfolio value do not warrant a big change in strategy. Your money matters, so treat it wisely.
Dan Searles, CFP, is a financial planner and a Registered Representative offering securities and advisory services through National Planning Corporation, member FINRA/SIPC, and a Registered Investment Adviser. Medallion Financial Group and NPC are separate and unrelated companies.
National Planning Corporation does not endorse the opinions expressed in this column. The information here is not to be considered as financial, tax or legal advice. As with any financial, tax or legal matter, consult your qualified adviser before taking action. No investment strategy can ensure a profit or protect against a loss. As always, past performance is not indicative of future results.