Retirement. Does Your Plan Need a Second Look?


In most countries, the idea of a fixed retirement age is of recent origin, being introduced during the 19th and 20th centuries - before then, the absence of pension arrangements meant that most workers continued to work until death, or relied on personal savings or the support of family or friends.

Calculating what you will need for retirement involves making an assumption about the return you will earn on your portfolio. Typically, assumed rates of return are based on historical average returns for various types of investments. You will also need to estimate how long you will need income after you retire. Whether you are on track to meet your goals depends in part on the accuracy of those assumptions.

Question your assumptions

It might be time to revisit your retirement calculations. "Past performance is no guarantee of future results" has always been true, but many investment professionals have begun to question whether stocks will match the

returns they have had in the past. It is not unusual to see forecasts for long-term portfolio returns that are 1 to 2 percentage points lower than the 7% to 9% inflation-adjusted figure often used to plan portfolios. That may not

sound like much, but even a 1% difference can be costly over time. For example, getting a 4% real return on $100,000 over 20 years would give you roughly $50,000 less than a 5% return.

Assess cost of uncertainty

Whether or not those forecasts prove accurate, you may want to double-check your estimate of what it will take for you to retire. Let's say you were counting on a 10% average annual return on your portfolio for the next 10

years. It might be a good idea to project what would happen if that figure turns out to be 5% to 6% a year. If you are counting on high returns to make up for insufficient savings, the impact of a lower figure could be eye opening.

Realistic projections about your investment returns are especially important if you are recently retired. Why? Because if lower than- expected returns in the early years of retirement force you to withdraw more to live on

each month than you had planned, those withdrawals will reduce the benefits of compounding over time. That in turn would affect the future value of your nest egg for the rest of your retirement.

You already know that saving more can increase your chances of having an adequate nest egg. However, there are multiple ways you can rethink your retirement planning--just in case.

Review your asset allocation

If returns for each asset class in your portfolio turn out to be lower than you have projected, you may need more in your retirement portfolio to give you the income you have been planning on after retirement.

To try to increase the nest egg available to you at retirement, you may want to reconsider your overall asset allocation. If you want to try to get back to a targeted level of return for your overall portfolio, one way might be to increase the percentage that is devoted to asset classes that carry more risk but also have greater potential for higher returns. You also could consider investing in new asset classes that you previously haven't included in your strategy. Diversifying into investments whose performance may be very different from those you already own might change your overall return.

Diversification doesn't ensure a profit or guarantee against a loss; what it does do is give you more options for balancing risk and potential rewards.

Consider your income needs projections

People are living longer than they used to, which means your nest egg might also need to last longer. Postponing full retirement can help your money last longer, especially if returns aren't what you had hoped. Also, look

at whether your spending estimates for retirement are realistic. Reducing the annual percentage of your savings you plan to withdraw to use as income after you retire will increase your nest egg's longevity. Another way to address your projected income needs is to consider investments that can provide a lifetime income stream.

Remember, most people would like to spend more, not less, in retirement.

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