New York, NY (PRWEB) April 02, 2013
The questions abound: will retirement investments perform well? Will the money last? Asking the right questions seems easy; however, the answers may be more complex.
Many investors believe their aim should be to save a given amounta magic number, says Steven Abernathy, Chairman and co-founder of The Abernathy Group II Family Office. Rather than aiming to save a particular total, its vital to consider how that total is going to be part of your retirement plan. There are two schools of thought: 1) acquire enough principal to live on its interest at 7%, or, 2) spend down annually. Dont underestimate the importance of advance planningit can save headaches down the road.
The first strategy of living off 7% principal works as long as it’s enough to cover spending. Inflation, stagflation (the occurrence of a recession and high inflation due to the government infusing the money supply with extra cash), taxes, fluctuations in portfolio investments and other variables taken into account mean this isnt guaranteed. Diluting the money supply may be a macroeconomic band-aid; however, it can be a whopper for the retiree and may affect the classic spending down model.
Investors easily forget that the moment they begin spending down their principal, not only is their nest egg diminishing, but, the earned interest is significantly less, says Brian Luster, Principal and co-founder, Inflation and stagflation usually equate to spending more for the retireeso its important to allow for variables as much as possible in your retirement plan.
An investor has saved $ 1M for retirement. He requires $ 84,000 per year to support his ordinary living expenses ($ 7,000 in monthly expenses). Many investors believe simply earnings 7% per year will be sufficient in order to accomplish this, without drawing down principal. However, this is not the case. Remember, the investor must pay taxes on his 7% earnings, or if this is in a retirement account, must pay taxes on his withdrawals. Even at a 15% tax rate, principal will degrade to $ 600,000 by age 75. By age 84, the investor is broke. (Note: The 7% earnings in our example exceeds present market rate; 30-year investments currently earn around 3% today.)
Here is an example of what can be achieved when planning starts early.
Investors who want to maintain their standard of living need more, yet, many have become increasingly cautiousnot surprising given the global economic picture. History tends to repeat itself, yet, investors dont always listen. 1929, 1973, 1980, the early 2000s, and 2008, to name a few periods in the past 100 years, brought economic fluctuation which affected a wide breadth, yet, the average investor still does not always recession proof retirement savings.
General wisdom encourages investors to save: maximize 401K plans (especially if theyre matched) and take advantage of pre-tax plans such as a Roth IRA. As investors age, generally risk is not encouraged. But, is there such a thing as too conservative? Low interest rates will bring in lower returns and may diminish an investors purchasing power. According to the U.S. Labor Department, there was a 39% loss in purchasing power between 1991 and 2011. If this trend continues, it is likely to reduce the standard of living for retirees and affect even those who have amassed millions.
So what are the alternatives?