Monday, June 10, 2013

Retirement Blues

The New York Times carried a long article last Saturday about the challenge of saving enough for retirement.

It used to be, for example, that if someone had $1 million saved for retirement, not only would they be considered well-off but they would also be presumed to be "all set" for the remainder of their lives.

However, with interest rates at record lows, and life expectancies continuing to climb, it could be that $1 million may not be enough.

The authors note a retiree who keeps a high proportion of their retirement assets in bonds faces a fairly high likelihood of running out of money (I have added the emphasis):

The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die

The article goes on to suggest that the only real investment option for most retirees is to significantly increase their allocation to equities, even though it probably means accepting more volatility than most seniors are comfortable with:

Assume, for example, a diversified portfolio that is 80 percent invested in stocks and 20 percent in bonds — a much higher stock-to-bond ratio than advisers typically suggest for someone near retirement. In that situation, under current market conditions and at a 4 percent withdrawal rate, the probability of running out of money drops to 14 percent. That’s mainly because of higher expected returns for stocks. At a 3 percent withdrawal rate, the probability of outliving the portfolio is only 4 percent. 

But then stock market risk comes into play. Over the long term, stocks tend to outperform bonds, but typically fluctuate much more wildly. There’s a good chance that at some point, stock investments will produce major losses that many people simply can’t tolerate. 

So should someone retiring today overweight equities in their portfolio even as the market reaches record highs?

The math says that you should. However, if the market takes a sudden nosedive, new retirees would face the uncomfortable decision of either cutting back expenses or taking a higher withdrawal percentage than most advisors recommend.

Meanwhile, many seniors are already experiencing shortfalls in their retirement income, according to an article on CNN:

Seniors in almost every state in the country are falling short when it comes to affording their golden years, according to a study released Monday.

Nationwide, seniors are living off of a median household income of $35,107, roughly 57% of the median income of their younger counterparts ages 45 to 64, according to an analysis of 2011 U.S. Census Bureau data by, a financial information website owned by

 "We found that many senior citizens are significantly underfunded and risk running out of money," said Mike Sante, the site's managing editor.