Business viewpoint: Longevity may be greatest financial risk
BY DONNA MADDOX Business Viewspoint
Thursday, August 09, 2012
8/09/12 at 3:57 AM
Are you worried about running out of money before you die? If so, you're not alone, because studies show that 64 percent of those 55 and older say that this is their biggest concern.
They worry less about growth than about preserving the assets that they have worked so hard to accumulate over the years, and they want to make sure those assets are going to last as long as they do.
Longevity is one of the many risks we face, yet it is often one of the most overlooked and underestimated.
For a married couple aged 62, there is a 25 percent chance that one of them will live to age 97. That is 35 years after retirement. Have you calculated the amount of money you would need to last 35 years? Most people have not.
In order to live and maintain our desired lifestyle, we have to plan with the assumption that we are going to live longer than expected. We can do that by working longer, saving more, or achieving a higher rate of return on our investments.
Stock market volatility compounds the problem. While conventional wisdom has always said that the greatest potential for growth is in the stock market, there is also the added degree of risk because of its unpredictability.
John Maynard Keynes, a noted economist, once said that "markets can remain irrational longer than you can remain solvent."
If the last 12 years have taught us nothing else, it has shown how long an underperforming market can last.
Another question you face is deciding how much you can safely and comfortably withdraw for your retirement income.
Studies done 20 years ago told us that if you don't exceed a 4 percent withdrawal rate, you have a very high probability of never running out of money. New research tells us that, depending on the portfolio and with a 30-year life expectancy, a 3 percent withdrawal rate may be more appropriate. Increase that to withdrawal to 4 percent, and the probability could drop significantly.
With these things in mind, a well-thought-out investment and distribution strategy should be at the core of your financial plan.
Donna Maddox is an investment adviser representative and general securities principal with Financial Planning Resources Inc. in Tulsa.
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