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The Effect of the Market on Retirement Solvency

By Harry S. Margolis

While the ups and downs of the market can have a favorable or deleterious effect on savings and investments while we’re saving for retirement, they have a much larger effect on solvency during retirement. This was illustrated by financial planners Amy Lampert and Richard Belofsky of The Bulfinch Group speaking at our firm’s monthly First Monday Lunch for Professionals.LampertAmyWEB

Amy and Richard handed out an illustration showing what would have happened if a 41-year-old had put $100,000 in market and left it there until she retired at age 65. It would have grown to $621,115 after various ups and downs over the ensuing 25 years. Then the illustration shows what would have happened to the same $100,000 if the market returns were reversed, so that what the portfolio earned in year one in the first example, it earned in year 25 in the second example, and vice versa. (In this case, it lost 9% in year one and gained 19% in year 25.) Surprisingly, in the second example our theoretical retiree would have the same $621,115. Of course, this example is simplified, not including additions or withdrawals, taxes, investment expenses, or any other variables during the two and a half decades.

Then the illustration shows what would happen to our retiree’s $671,115 nest egg under different investment results if she were to withdraw $33,556 (5%) in the first year with this amount increasing 3% per year. In the two examples, the investment returns are the same as they were during the 25 years that she accumulated the funds. Unfortunately, with the first series of investment returns, she would run out of money in year 19 at age 84. With the reversed series of returns, starting with a 19% gain rather than a 9% loss, at age 90 she would still have more than $1.8 million in investments.Belofsky_Richard_WEB

This illustration is also simplified, not reflecting any expenses and assuming that the entire portfolio is invested in the market. In addition, while the post-retirement figures show the results with annual withdrawals, the pre-retirement numbers do not show annual contributions to the fund, so we may be comparing apples with oranges. That said, the difference in retirement security depending on market performance is so striking that it argues for taking steps to mitigate the risk of the marketplace.

Of the many points Amy and Richard made, I will pull out four:

  • Investors spend too much of their energy focused on getting an edge in the market. This is almost impossible to do and much less controllable then rebalancing assets, saving more and keeping costs down.
  • Almost everyone should save more than they do. Look at your expenses. Could you save $1,000 a year or $1,000 a month to put into savings — skip a few lattes or nights out at restaurants (unless that’s what keeps you sane) or the new car this year. That will contribute more to your retirement than anything else, especially if you’re not already maximizing 401(k) contributions and your company’s match.
  • Most people don’t understand the difference between risk assets — stocks and bonds — and guaranteed assets — insurance and annuities. While annuities have gotten a bad name, often rightfully so, they can be used to hedge against market fluctuations and to help protect us from outliving our savings.
  • There are too many one-product salespeople out there in the financial world. People who sell annuities tout them as the sole financial planning answer. Those into index funds see them as the only way to invest. In fact, all of these are tools and the secret is to secret is to find the right mix for each individual client.

In short, it’s a complicated financial world out there with no one size fits all financial solution. This is why we need the help of financial professionals.

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