It’s the worst time to retire in a generation, according to a recent analysis by Bankrate.com. The financial website looked at historical and projected yields for both stocks and bonds, interest rates and returns on annuities, as well as projected health-care costs, to make this determination.
“You see a lot of surveys of retirees and rising anxiety,” says Chris Kahn, who did the analysis. “We wanted to try to put things in a little better context. Most people thinking about what retirement is going to look like have their parents and grandparents as models. We’re pointing out that it’s not a good model to have.”
Here are the specific scenarios that illustrate the problem:
Let’s say your mom and dad retired in 1980 with a $1 million portfolio of 60 percent stocks and 40 percent bonds. Their plan was to withdraw $40,000 a year — 4 percent of the principal — to live on. Their nest egg would have earned 6.9 percent average annual return and by 2010, if they should live so long, they’d still have $1.3 million in the bank.
However, if you retired today with that same $1 million, with that same 60/40 mix of stocks and bonds, and with plans to withdraw that same 4 percent, your account would be empty in 25 years or less. That’s the projection based on recent and future expected rates of return for both types of investments.
Or look at annuities, which have been touted as a safe alternative investment vehicle for long retirements. In 1990, an annuity that guaranteed a lifetime payout for a 65-year-old man required an investment of about $9 for every $1 it paid out. In 2010, you needed to put in $15 investment for every $1 in guaranteed annual income. And that dollar, of course, was worth much less due to inflation.
The long-term impact of Obamacare on health-care costs is unknown, but under most scenarios Medicare costs continue to impact the budget, and lawmakers are likely to continue to seek new ways to pass those costs back to seniors. And the effect of longer life expectancies is that people have to plan for more years of retirement to boot.
The numbers are ugly, but don’t panic. Kahn says if we are prepared and adjust our assumptions, we can increase our chances of long-term financial security. Here are some key tips.
• For a long time, the rule of thumb has been to draw down 4 percent a year from your nest egg. To deal with the current low-yield environment, Khan says, you should plan instead to take out more like 2.5 or 3 percent per year. Planning for lower yields means saving more. At the lower rate of drawdown, in order to take out $40,000 a year you would need to save $1.6 million.
• See if you can put off retirement a little longer. It may not be as long as you think; just a few years could make a big difference, especially if your job pays for health-care costs. “Holding onto your job a little longer does make a lot of sense,” says Kahn. “In many scenarios, if you can last five years longer, not only will your account be growing, but your yields might be different.”
• Try to diversify beyond just stocks and bonds. The yield picture is always changing; for example, the imminent bankruptcy of Detroit is likely to have repercussions in the municipal bond market far beyond just the one city. Muni bonds until now had been highly touted as another retirement portfolio option for the taxable portion of savings. They still may be a good option for you, but the healthiest retirement portfolio may contain a mix of real estate, cash equivalents such as Treasury bonds, and even commodities and other vehicles alongside stocks and bonds.
Anya Kamenetz can be reached by email at diyubook@gmail.com