Blog, Retirement Planning

Basics of Retirement Planning


You’ve probably given a lot of thought to what your dream retirement will look like. Now it is time to decide how you are going to pay for it. Like the rest of life, retirement doesn’t come with guarantees. But a sound investment strategy is an excellent start towards helping you pursue your retirement goals.


When approaching your retirement years, certain questions take on paramount importance.


First, barring unforeseen circumstances, how long should we expect retirement to last?

Second, how do I invest for growth so that I can afford retirement?

Third, how are conservative and aggressive portfolios different?

And fourth, what are good questions to ask my financial planner?


Let’s examine these questions one at a time.


How long will my retirement last?

Over the last century, life expectancy has risen dramatically in the U.S. In 1900, the average life expectancy was 49.2 years. Americans had a much higher life expectancy of 78.6 years in 2017, according to the most recent statistics available.


The current retirement age of 65 years was established in the late 1800s and was based, at least in part, on the fact that the average person lived 15 years fewer than that. With all the advances in technology and medicine, it’s possible that many of today’s retirees may live much longer than their ancestors.


One out of three males and one out of two females in their fifties today will live to age 90. For a 65-year-old couple, the life expectancy goes up even more. There is a 50% chance that one of them will live to age 92.


How do I invest for growth?

You may want to consider investing a portion of your retirement portfolio for growth.

Among the more common investments in this class are individual stocks and growth-oriented mutual funds.


When considering growth investments, it’s important to understand what determines a portfolio’s overall return.


A landmark study[1] found that 91.5% of a portfolio’s return is a result of its overall asset allocation. That far outweighs any other factors—including selection of specific investments.

That means it’s far more important to develop a sound investment strategy than to pick individual stocks. It’s also important to invest in a mix of asset classes that are consistent with your strategy. However, past performance does not guarantee future results. And asset allocation is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.


How can conservative portfolios differ from aggressive portfolios?

Over the past 20 years, the aggressive portfolio, with 80% in the equity markets, was volatile. In its best year, it returned 24.3%; in its worst it lost -29.3%. Overall, it averaged a 6.2% annual rate of return for the period.


In its best year, the conservative portfolio, with 20% in the equity markets, returned 8.1%; in its worst, it lost -7.1%. And over 20 years, it averaged a 3.7% annual rate of return.


So what’s better? That depends on your individual situation. However, the difference between a 6.2% return and a 3.7% return can add up over time.


The difference between the conservative portfolio and the aggressive portfolio was roughly 2.5% per year.


For example, one $100,000 portfolio generated a hypothetical 6.2%, while another generated a 3.7% return over 20 years. At the end of the period, the portfolio that produced the hypothetical 6.2% annual rate of return was worth $281,729. The portfolio that produced the hypothetical 3.7% annual rate of return was worth $202,915.


That’s an $80,000 difference.


Past performance does not guarantee future results. Actual results will vary.

 What are good questions to ask to your financial planner?


“Are our investments balanced in a way that is appropriate for our life stage and goals?”


“What is our overall return on our investments, and how do we know if we need to make some changes?”


“Will my retirement plan provide enough income, along with Social Security and savings, to meet my needs? “


“How shall I pass my business along when I retire?”


“How should we best allocate our assets to provide enough income for our various dependents? “


“Are there investment options that may help us defer taxes until we reach a lower income bracket?”


“How are my individual stock and bond investments measuring up in comparison with the managed funds?”


“Will the return on my investment portfolio outpace inflation?”


The answer to these and other concerns will vary with each individual situation and can all be addressed in a review. As always, feel free to contact us with any questions as to how these issues may fit into your overall financial plan!


This information is not intended to be a substitute for specific individualized financial advice, and we suggest you discuss your specific situation with a qualified financial advisor.

[1] Brinson, Singer, and Beebower, “Determinants of Portfolio Performance II: An Update,“ Financial Analysts Journal, May-June 1991.

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