Investing Through Retirement (Not Just To Retirement

Retirement is often best viewed as a journey rather than a destination. A retirement plan must be able to evolve, adapt and transform with changing needs throughout the life of the plan. Two big issues that must be planned and accounted for in a retirement plan are longevity and inflation. In other words, there should be a high probability that retirees won’t outlive their money and that the increasing costs of goods and services are accounted for and, ideally, outpaced. Many retirees underestimate how long they will live in retirement, and therefore how long their assets need to last. This is doubly true if they are married. If you are married and both individuals live to age 65 there is almost a 50% chance one person lives to age 90 and a one in five chance one lives to age 95 or older.* This means that, depending on what age one retires, most people will need to plan for 30 or even 40 years in retirement. In addition to one’s assets needing to last a long time, the purchasing power of these assets can be reduced over time by inflation. For example, let’s say someone retires today and needs a $4,000 net distribution from their portfolio each month for living expenses. In 20 years, assuming a 3% annual inflation rate, a $4,000 distribution would only be equivalent to $2,215 in today’s dollars. In other words, there is a 45% reduction in the purchasing power of the distribution.

* Source: Social Security Administration, Period Life Table, 2018 (published in the 2021 OASDI Trustee Report); American Academy of Actuaries and Society of Actuaries.

“Reputation is what others perceive you as being, and their opinion may be right or wrong. Character, however, is what you really are, and nobody truly knows that but you. But you are what matters most.” – John Wooden

How then does someone effectively plan for longevity and inflation in retirement? One important key is to invest retirement assets for the long-term with a goal of getting a return above inflation. Understandably, many people entering retirement have a desire to protect their assets from any investment risk. They may even move retirement assets to low investment risk assets like cash, unwittingly exposing themselves to a real risk of running out of money before the end of their retirement because of longevity and inflation. While no one should take on more risk than they have to, in order to get a return that outpaces inflation over time a portfolio must have some investment risk. It’s important to work with your advisor to develop a retirement plan that’s right for you and invest assets in a risk-appropriate way that lines up with your overall financial plan. And once a plan and portfolio are developed, both must be periodically monitored and updated. There also needs to be discipline to the plan. Over a 30-to-40-year retirement there will be market volatility. But making short-term decisions, like moving assets out of the plan’s portfolio to something seen as “safe” like cash during down markets, can have a huge impact on the success of the plan. From January 1, 2002, through December 31, 2021, the S&P 500 returned 9.52% annually. But missing just the best 30 days during this period reduced the return to just 0.43%.** In other words, one month out of the market over 19 years resulted in returns that would not have outpaced inflation. It is best to plan for a long retirement, invest to mitigate the impact of inflation for the life of the plan, and annually review and update your plan with your advisor.

**Source: JP Morgan Asset Management analysis using data from Bloomberg.