By Stephen Kelley
I have been noticing some things lately that I find both troubling and consistent with things I have known and been speaking and writing about for some time. That's the struggle the industry has when it comes to promoting and discussing the very important issues facing today's and tomorrow's retirees.
As I wade through all the pabulum on TV and in the financial press, it's difficult to believe I am not being scammed, or at least patronized. Think about the things you see. One of my favorites is those little orange origami rabbits and squirrels and other creatures that seem to hang around on park benches. Another one, also by the same company, is about the orange money. Then there's the one that just wants you to follow their green line, or put their blue dots on the wall, or stretch ribbons across big circles in the middle of the lawn.
What do any of these things have to do with investing or retirement? How do they possibly help prepare you to choose a planner? What pertinent questions do they answer? In fairness, they are 30-second commercials, but I don't know one of them that gets to the core issues, which I will discuss later.
Looking for a place where I might find more, I went online and searched for "retirement prep." Oneof the first places I landed was Investopedia, which discussed some of the issues like: When will you retire? How long do you think you will need money for? But when it came to what to do with your money, here is what it said: "The key is that we assume that savings will grow at a real rate of return of 6% annually. The numbers would actually be growing at 10% annually, but inflation would be running at 4%, so the growth in purchasing power would actually be 6% per year."
Another site also indicated you should count on 7.5% per year and draw 6% per year during retirement. Others indicated a range of 8% to 12% expected returns over time and recommended anywhere from 5% to 6.5% income distributions.
These articles are in direct contradiction to many of the retirement income studies. For example,Morningstar, in its study "Low Bond Yields and Safe Portfolio Withdrawal Rates," reports: "We find a retiree who wants a 90% probability of achieving a retirement income goal with a 30-year time horizon and a 40% equity portfolio would only have an initial withdrawal rate of 2.8%. Such a lowwithdrawal rate would require 42.9% more savings if the retiree wanted to pull the same dollar value out of the portfolio annually as he or she would get with a 4% withdrawal rate from a smaller portfolio."
T. Rowe Price released a study, "Dismal Decade Offers Cautionary Lessons for Retirees," in which it concluded that a person who retired in 2000 would have had a 94% chance of running out of money taking only 4% a year plus a modest inflation adjustment each year.
Every year, Dalbar releases a study called "Quantitative Analysis of Investor Behavior." It doesn't really deal with how much you need in retirement; rather, it's about how much you can expect toearn in the market. The news isn't good. It turns out our returns are less about what the market will actually yield over time, and more about how we behave.
For the past 30 years, the S&P 500 has returned 10.35%; however, the average equity investor has only received 3.66%.
Bonds are even worse: Barclays Aggregate Bond Index has averaged 6.73%, but the average investor has only received .59%! That's less than 9%.
Then, there are the fees, which, of course, is why everyone wants you committed to these risky ways of doing things. In the April 23, 2013, broadcast of the PBS show, "Frontline," Jack Bogle, founder of Vanguard, had the following to say about fees: " the financial system put up 0% of the capital and took 0% of the risk and got almost 80% of the return. And you, the investor, put up 100% of the capital, took 100% of the risk, and got only a little bit over 20% of the return."
So there it is. Just stay the course, stay invested, keep risking your nest egg, and things will be fine. Or not. Which is it? The really revealing thing to me is that the only course of action any of these people recommends for overcoming your precarious position is to invest more and spend less. In other words, double down on a bad bet.
If you've been reading this column for a while, none of this is new to you. And there is an answer, but you may not like it: Purchase an income annuity. With an annuity, you are purchasing aguaranteed stream of income that will last as long as you do, and it's guaranteed. Some people willdismiss the guarantee, saying it's only as good as the insurance company behind it.
Right. Let me ask a question: Did you ever, or do you now, own life insurance? When you werepurchasing that insurance, did anyone ever pop up and say, "Wait, it's only as good as the claims-paying ability of the insurance company"? Probably not. And there's a reason for that. Insurancecompanies don't default. See, it's not their money. If they go out of business, which they do, yourmoney goes to another insurance company. It doesn't go to creditors, or shareholders, or even the IRS.
It's not their money. It's yours. Guaranteed. And that is a winning hand.
Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, N.H., he services Greater Boston and the New England areas. He is the author of five books, including "Tell Me When You're Going to Die and I'll Tell You How Well You Can Live," which deals with the problem that unknown lifespans create for retirement planning. It and his other books are available on Amazon.com. His radio program, "The Free Money Guys," can be heard every Sunday at noon on 980 AM WCAP. He also conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com.