Each year, Financial Advisor Magazine puts on a Retirement Planning Symposium in Las Vegas . The three-day conference provides a sobering look at the state of Americans' retirement savings and the issues that you and I will face as we move into retirement. The message that I generally take away from the conference and am compelled to share with you is that if they don't start saving more, spending less and planning for a retirement that could last thirty years or more, most Americans will be retiring later and poorer, if they are able to retire at all. What about you? Will you be able to retire?
The High Cost of Retirement
For years, financial planners and the financial media have been telling us that we'll likely need 70% of our pre-retirement income in retirement. And for years, financial planners have based their financial plans and retirement projections on that assumption. But times have changed. With the baby boomers set to live longer, more active lives in retirement, and with the cost of health and long-term care rising at a staggering rate, many financial experts believe that you may need as much as 120% of your pre-retirement income to sustain you throughout retirement. Since the true number may lie somewhere in between, let's assume for now that you'll need a level of income at least equal to your pre-retirement income to provide you with a long, comfortable retirement. The earlier you plan to retire, the more you will need. If you are planning to retire in your 40's or 50's, it might be safest to assume that you'll need a retirement nest egg and sources of income capable of generating as much as 120% of your pre-retirement income. You should also consider taking three weeks off of work to test out what your early retirement may be like. Many who've taken the three-week retirement test discovered that being retired was not what they expected and decided not to retire (or at least not completely). Once retirees get the traveling bug out of their system and settle into the slow pace of retirement, many find that they miss having somewhere to go each day and something meaningful to do. Aside from having enough money, the key to a long, successful retirement is maintaining an active, healthy lifestyle and having enough meaningful, enjoyable activities to occupy your time. That's why much of the retirement planning I do with clients involves envisioning what a 30-year retirement may be like and developing a list of meaningful and enjoyable activities to pursue, including unfulfilled dreams and aspirations.
Robert Arnott, the manager of the Pimco All Asset Fund and former keynote speaker at the Retirement Planning Symposium, commented that on his flight to Las Vegas he sat next to two women in their mid 70's. They had just come from hiking in the Appelachians and were on their way to Las Vegas "to party!" Clearly, we have a new breed of retiree who wants to be active and "party" throughout his or her retirement. But that will require good health, an active mind and body, and lots of money.
According to my associate, Stan Compton , it costs the average family approximately $15,000 a month to live in Los Angeles (obviously, we have some wealthy Los Angelenos). And while you may be living on less, my work with financial planning clients has shown that it costs most of our clients anywhere from $10,000 to $15,000 a month to live in Los Angeles . Of course, those numbers account only for living expenses and taxes, not the money you will need to save and invest for your retirement. Perhaps that's why most people's retirement savings are only a fraction of what they'll ultimately need to live on in retirement, but we'll address that issue in a moment.
If it costs an average of $12,500 a month to live in Los Angeles today, I believe that you should plan to need between $12,500 and $15,000 a month ($180,000 a year) to live comfortably throughout your retirement. How many of you will be able to generate that level of income without working? I'm afraid not many, including many with high current incomes. So what can you do? Start saving more, spending less and, if you have not already begun to do so, start planning for retirement.
You might think that $12,500 to $15,000 a month is ridiculous, that you will be able to live on much less. Maybe you will. But unless you plan to sit in a rocking chair and watch the world go by for the next 30 years, I would not count on it. I would rather plan to need more and be pleasantly surprised by not needing as much than the other way around.
When social security was first implemented, the average retiree collected benefits for four years before he died. Today, baby boomers retiring at age 62 can expect to live another 30 years, and that number is getting longer. Recent studies by the Mayo Clinic have shown that the cell structure of today's 65 year-old is comparable to the cell structure of a 45 year-old 30 years ago. In other words, "65 is the new 45." Today's retiree is healthier, more active and living longer, and it will take more money to do the kinds of things that he or she want to do in retirement.
The primiary factor driving today's higher-cost retirement assumptions is the high and continually rising cost of health and long term care that will likely be required in most retirees' final years. It's not that you'll need $15,000 a month to live on most years in retirement. However, it could easily average out to that number when you factor in the high anticipated cost of health and long term care in the later years of your retirement. And if you've priced long term care insurance lately, you know that insurance companies are not raising their prices because they think that the cost of long term care will be going down in the future.
According to a friend whose wife is currently undergoing cancer treatment, the hospital cost alone is $3,000 a day. Just imagine what that cost will be in 20 years. In the 1960s, almost no one survived cancer. Today, modern medicine has made it possible to survive cancer and many other serious ailments, but at a high and continually rising cost. That cost will only continue to rise and you should be planning for it in your retirement planning by saving more and by purchasing long-term care insurance.
I also recommend that pre-retirees and retirees talk with their their parents and siblings about those individuals' retirement and long-term care planning so that the unexpected need to pay for a parent's or sibling'shealth, living or long-term care expenses for an extended period of time does not have an adverse affect on your retirement nest egg or your personal financial security.
What will it take to retire?
$1,000,000 used to seem like worthy target for an individual's retirement savings. If you had $1,000,000, you were considered "rich." But in Los Angeles and other major cities, $1,000,000 is not enough of a nest egg to sustain the majority of our clients through 20 to 30 years in retirement without dipping into their principal. Since I like to be conservative, let's assume that you'll be able to generate a 6% rate of return on your investments in retirement (more on why later). At 6%, $1,000,000 will generate $60,000 a year before taxes. But how many of you can live on $60,000 a year before taxes? If it costs the average family, $150,000 a year to live in Los Angeles and other major cities, assuming a 6% rate of return, the average couple living in Los Angeles needs a retirement nest egg in the neighborhood of $2,500,000 to live comfortably throughout retirement. The exact number will, of course, be based on your current and anticipated lifestyle. Let's also not forget that many future retirees who had children in their late 30's, 40's and even 50's, like me, will still be paying for college educations in the early years of their retirement. And like the cost of health and long-term care, those costs are only going up!
So if you're thinking of retiring anytime soon, take a good, hard look at your retirement nest egg. Is it $1,000,000? $2,000,000? $3,000,000? When you factor in Social Security and other sources of income, will you have enough to sustain you throughout 20 to 30 years in retirement? If not, then you have some retirement planning to do. You may need to save more, earn more, work longer or take steps to reduce the amount of money you'll need to sustain you in retirement? And while they may not be your first choices, you may want or have to consider reducing your standard of living or moving to a lower-cost state. Many retirees are selling their homes in the big, expensive cities and moving to states with a lower cost of living, some with no state income tax.
Don't expect the stock market to bail you out of not having saved enough for retirement
If you're expecting the stock market to generate the kinds of returns we experienced in late 90's and make up for your not having saved enough for retirement, you had better think again. While some financial advisors and money managers are still livng in the past and promising their clients 15% to 20% average annual returns, the best and brightest in the investment and financial planning communities expect stocks to return approximately 3% above the rate of inflation for the forseeable future. So if inflation is 3%, you can expect stocks to return around 6% a year on average-a far cry from what they returned in the late 1990's and what most investors expect from their stock investments. But history shows 6% returns to be a realistic assumption.
Throughout the 20 th century, in spite of the returns we experienced in the last quarter of the century, the average rate of return on stocks was approximately 3% above the rate of inflation. The 20 th century was a century of unprecidented growth and technological advances. Individuals went from the horse and buggy to jet airplanes and rocket ships. We experienced the invention of personal computers, the internet, cell phones, compact digital cameras, teleconferencing and medical breakthroughs that are keeping us alive much longer. If a period of such unprecidented growth and technological advancement yielded average annual stock returns of only 3% above the rate of inflation, then why should we expect anything more for stocks in this century, let alone the 15% to 20% annual returns we experienced in the late 1990s? According to Warren Buffett, Robert Arnott and other highly-respected financial experts, we shouldn't.
Still, many of you are relying on the kinds of stock returns we experienced in the late 1990's to grow your retirement nest eggs and secure a long, comfortable retirement. Many financial planners are still using 10% to 12% returns in their retirement planning projections. But if Warren Buffett, my colleagues and I are correct, their clients will be sorely disappointed and many of them will be unable to retire. My associate, Lou Stanasolovich (one of the nation's top financial advisors) uses stock returns of only 2% above the rate of inflation in his retirement planning projections. And unfortunately, Lou is not just being conservative. Like Robert Arnott, he strongly believes that we are in the midst of a secular bear market and that the stock market will have a hard time generating even 5% average returns over the next twenty years. If he's right, his conservitive planning projections and recommendations will force clients to do whatever they need to do to be able to retire comfortably. I agree with Lou that it is better to be conservative and pleasantly surprised by higher than expected market returns than to be overly optimistic and put our clients' ability to retire and financial security at risk.
So if you're expecting 10% to 20% returns from your retirement portfolio, it would be prudent to lower your expectations now and determine whether or not you'll be able to retire (or meet your cash flow needs in retirement) on substantially lower 6% average annual stock returns. And if your portfolio is in bonds, you should expect average annual returns of one to two percent lower.
In the past few months, I've seen a number of financial and retirement planning projections where advisors used return data from the past 20 years as the basis for their projections. That is not only foolish, it's also extremely dangerous to their clients' financial health. In some of the illustrations, the advisors projected the unprecidented 10% to 12% returns that bonds and bond funds enjoyed over the past 10 years into the future, as if you should expect those kinds of returns in the years ahead. Over the past twenty years, interest rates declined steadily to historic lows, which drove up both stock and bond prices. But the decline in interest rates was especially favorable to bonds and provided a tail wind that enabled bonds and bond funds to earn rates of return that we are unlikely to experience again in our lifetimes. With interest rates still near their historic lows and unlikely to go much lower, it's extremely unlikely that bonds will deliver anywhere near 12% on average in the years ahead. In 2007, the Vanguard Total Bond Market Index Fund returned 6.9%, which is exceptional compared to its meager returns in 2006. But 6.9% is still a far cry from 12%, which we are unlikely to see anytime soon. So if you're using bond yield and total return assumptions in your retirement planning, be careful and conservative.
Don't expect Mom and Dad to bail you out either!
Some individuals aren't worried about the current or future value of their retirement nest egg because they're counting on an inheritance from Mom and Dad to sustain them throughout their retirement. But that could be a costly assumption.
My grandmother lived to age 96. My wife's grandmother lived to age 92. If our grandmothers lived that long, our parents could easily live that long or longer. If they're in good health, they'll continue to spend money maintaining their lifestyles and doing the things they enjoy. However, if the returns on their investments are low (as many advisors predict they will be over the coming decade) many of our elderly, retired parents will have to take greater risks with their investments or dip into their principal to maintain their lifestyles in retirement. And that scenario could go on for another ten, twenty or thirty years, overlapping with our own retirements. That means that many individuals who are relying on an inheritance from their parents to support them in retirement may have to delay their retirement or consider other alternatives.
As we all know, increased longevity does not guarantee good health. As medical science enables us to live longer, it means that some of us will live longer in poor health and at a high cost. And because the majority of Americans do not have long-term care insurance, many of our parents will deplete large portions of their estates (possibly all of their life savings) paying for the high, continually-rising cost of long-term care in the last years of their lives. Children counting on inheritances from their parents to support them in retirement will likely see large portions of their inheritances whittled away by the high cost of their parents' health and long-term care.
What can you do to plan for your retirement?
Unless you are independently wealthy, the only way to meet your retirement needs and objectives is to save and invest more money on a regular basis for retirement, no matter what it takes to do so. Keynote speaker, Robert Arnott told the audience of financial advisors in Las Vegas that our clients have got to contribute the maximum amount to their retirement plans and contribute more to retirement savings outside of their IRAs and qualified plans. He stated, "You can't spend money that you have not saved" which is what he believes most of us are doing. He also advised us to base our retirement investment projections on more conservative, realistic return assumptions.
In addition, you should evaluate your insurance needs in retirement. Are you independently wealthy or will you need long-term care insurance?
I recommend that even clients with substantial assets consider purchasing long-term care insurance because as expesive as that coverage may be, the cost is only pennies on the dollar compared to what the cost of long-term care in 10, 20 or 30 years could do to their retirement nest eggs and overall estates. If they have plans to leave financial legacies to children, grandchildren or favorite charities, those plans could be derailed by the high cost of ongoing long-term care.
Once again, you may also want to consider moving to a lower-cost state or retirement community. Moving to states like Florida , Texas or Nevada can not only save you a fortune in income taxes, it can also make your retirement dollars go a lot futher. It's no wonder why so many people from the northeast want to retire in Florida .
Money manager Arnott also suggested that financial advisors look for ways to increase the 4% to 6% expected returns on stocks and bonds by an additional 3% by utilizing alternative asset classes, seeking investments that deliver higher risk-adjusted returns and actively managing our asset mix-some of the very things that we are doing to help our clients meet their retirement goals and objectives.
How innovative investment strategies can deliver higher returns in a low-return environment without taking on more risk
Over the past few years, I've come to the conclusion that conventional asset allocation and investment strategies are no longer the best ways to invest money in today's information age and volatile financial markets. And if we are in fact in a secular bear market, conventional asset allocation and investment strategies are unlikely to deliver the above average returns that will be needed to help clients meet their retirement goals and to meet the cash-flow needs of already-retired individuals.
Conventional asset allocation strategies left many investors sitting in investments that lost value day after day during the 2000-2002 bear market. Many who followed traditional "buy and hold" strategies held on day after day and watched their portfolios decline 50% or more while they waited for the market and their investments to rebound. What many of these investors did not know is that buying and holding only works when your portfolio is appropriately diversified, which many of their portfolios were not. 20 technology stocks is not diversification! The 2000-2002 bear market exposed the fact that many individuals' portfolios were inappropriate, overly aggressive and undiversified, and that many financial advisors had recklessly invested too much of their clients' portfolios (including retirees living on fixed incomes) in technology stocks.
In 2004, I began to look for strategies that could not only deliver the kinds of returns needed to help my clients meet their financial goals, but also protect their principal in future bear markets. My efforts led to the discovery of three effective and innovative investment strategies.
First is the Lower Volatility Portfolio strategy which was developed by Lou Stanasolovich of Legend Financial Advisors. The strategy, which utilizes investments with a low correlation to one another is intended to help conservative investors grow their nest eggs with minimal volatility and a minimal chance of loss in any calendar year. The LVP strategy, is intended to deliver equity-like returns with low, bond-like volatility. And for more than ten years (including prior to our using the strategy) it has done just that. On average, the Lower Volatility Portfolios have delivered average annual returns approximately one to two percent less than the S & P 500 with approximately one-sixth the S & P 500's level of volatility, and less volatility than the bond market. In 2007, our Lower Volatility Portfolios outperformed both the stock and bond markets. Of course past performance does not guarantee future returns.
Another strategy we have found to be effective in helping clients meet their retirement income goals and objectives is the incorporation of variable annuities with "living benefits" into our clients' retirement plans. When used correctly, these innovative and effctive investment vehicles can enable an individual to meet his or her retirement income needs and objectives, regardless of what happens in the financial markets. Variable annuities with "living benefits" are the only investment vehilcle that I know of that offer a specified minimum guaranteed annual income for life and unlimited growth potential. According to Ibbottson Associates, the addition of a variable annuity with "living benefits" to an investment portfolio has been shown to decrease its overall volatility and provide the potential for higher returns.
As excited as I am about the previous two investment strategies, I am even more excited about the growth and aggressive growth strategies we have implemented over the past few years which have delivered excpetional returns net of all fees. While one would assume that any growth strategy that delivers high returns must be risky, ours are not-at least not over the long-term. The growth investment strategies we are currently using produced high single digit and low double digit returns in two of the three years of the 2000-2002 bear market. Unfortunately, we were not using these strategies during the bear market but we are now!
Our growth strategies are based on the Upgrading strategy originally developed more than 20 years ago by DAL Investment Company (one of our strategic partners). The Upgrading strategy has delivered exceptional absolute and risk-adjusted returns for subscribers to DAL's No Load FundX newsletter and investors in their FundX Funds and individually managed accounts. Upgrading involves investing in funds with the highest rankings in DAL's proprietary ranking system. As funds lose momentum and slip in the rankings, they are replaced by higher ranked, stronger performing funds. That strategy has delivered exceptional returns for more than 20 years and has benefited our clients since we first started implementing the strategy in 2004 with average annual returns nearly double the S & P 500 net of fees. In 2007, they returned more than three times the return on the S & P 500 net of fees. Once again, past performance does not guarantee future returns.
What I like best about the Upgrading growth strategy is that it doesn't rely on fundamental stock, bond, fund or economic data and research that may or may not be accurate. It also ensures that investors remain invested in whichever funds are performing best and are never left sitting in poor performing investments during extended market declines or bear markets. Upgrading was the key to DAL's success in making money during two of the three years of the 2000-2003 bear market and in our clients' all-equity portfolios or the growth portion of our more diversified portfolios since 2004.
I am especially pleased that as a result of our close relationship with DAL Investment Company they have allowed Winer Wealth Management, Inc. to become one of only two firms nationwide that can offer its clients customized, individually managed DAL accounts.
With these cutting edge investment strategies in place, I believe that our firm is well positioned to help our clients accumulate funds for retirement, obtain continued growth and help them protect and preserve their retirement savings.
Rich Winer is the president and CEO of Winer Wealth Management, Inc. ( www.winerwealth.com ). He provides wealth management and financial planning services to individuals and families in Los Angeles and throughout the United States. Rich specializes in helping individuals nearing or in retirement to implement personalized strategies to protect and preserve their retirement savings, minimize taxes and increase the magnitude and longevity of their wealth. He is a charter member of Ed Slott's Master Elite IRA Advisor Group, an invitation-only group of IRA and retirement distribution planning specialists. He is often mentioned or quoted in financial publications like The Wall Street Journal and Financial Planning Magazine.
For more information, you may contact Rich at rich@winerwealth.com or call (818) 673-1695.
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