In retirement planning, have realistic expectations
Baby boomers are the first generation of do-it-yourself retirement planners.
Our parents and grandparents received defined benefit plans from their employers that guaranteed a certain income during retirement. All contributions and investment risks were the responsibility of the companies.
This changed in 1978 when Congress passed the Tax Revenue Act. Many Boomers are not prepared as retirement time is quickly approaching.
Boomers are lacking many of the same financial skills as the rest of society. We receive very little education about financial issues and do not have time to keep up with all of the changes.
We sometimes do not recognize these weaknesses because of the entire information overload that we experience every day. We are the generation that wants immediate gratification and thus, giving up enough of today's income for tomorrow's benefit is foreign to our nature.
Also, economic timing has been working against us.
Stock market crashes in 2000 and 2008 have made getting historic investment returns impossible. That is why some of our prime earning years are known as the lost decade.
Housing values have tumbled, which is often one of our two biggest assets.
We have often been asked what our tolerance for risk is. This is a constantly changing question and answer. When markets are rising, we believe that we can handle this risk. When markets are volatile or going down, we become intolerant to risk.
This is why too many of us try to time markets by jumping in and out. By doing this we achieve less total return than the overall markets does.
Many boomers got caught in the Great Recession. We got squeezed out of jobs and had to look for replacement opportunities when there were not many. These boomers not only lost income, but the chance to contribute to future retirement. Worse yet, some had to use retirement assets early just to stay afloat.
In a study done by the Federal Reserve, it was discovered that the median household headed by a person aged 60 to 62 had a 401(k) balance with less than one-quarter of the funds required to maintain their standard of living during retirement. One bright spot is boomers are expected to live longer than previous generations. Of course, this will mean that we need additional income.
Boomers are resourceful. Many will work a few more years than they originally thought. This will mean that we can earn income during our peak years a little longer and not need to tap savings as soon. We can allow Social Security to continue to grow and take advantage of delayed credits and cost-of-living increases.
It is important to know the difference between the accumulation phase and the distribution stage. The rules are completely different. We cannot tolerate as much risk during retirement. We need to have a foundation of guaranteed income to cover our basic necessities.
Many people have heard about the 4 percent rule during retirement. This says that if you take out 4 percent of your assets each year, indexed for inflation, you will not run out of money.
This rule actually comes from the Trinity Study. In this study, some professors studied historical data published by Ibbotson Associates to examine possible withdrawal rates based on historical market data. From this, they concluded that 4 percent was a fairly safe number.
There are a few shortcomings from this study. First, their research ignored taxes and investment expenses. Since most of this retirement money is coming out of qualified accounts, the recipients must pay taxes on the withdrawals. It is safe to say that there will be some expenses coming out for any investment.
Maybe the biggest thing that the rule does not consider is the sequence of returns risk. Simply, this means that if there is a market correction early in the withdrawal cycle, you will run out of money much quicker than if any decline comes later in your cycle. Averages can be the same, but a sudden drop followed by later large increases will not keep you from running out of money. As you dip into more of the principle, there is not enough to earn back the losses.
The best way to protect yourself is to have realistic expectations and work with a distribution specialist.
Brokers often do not have the full arsenal of products available to meet all of the retirement challenges.
Gary Boatman is a certified financial planner and a local businessman who serves as president of the Monessen Chamber of Commerce.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Mon City man arrested for alleged assault
- Holiday spirit alive & well in Mon Valley
- Holiday shopping season off to early start in Mon Valley
- Recovery – it’s not just for addicts anymore
- Sanitation truck driver fired after Donora crash
- Christmas Cheer Club initiative benefits needy Mon Valley kids
- West Brownsville mother, daughter collaborate on children’s tale
- California surplus shop owner, nephew plead guilty to theft
- For some, pathway to Thanksgiving often bumpy
- Rostraver woman collecting blankets for homeless vets
- Monessen-native Sarra anchoring Navy football team’s defense