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Retirement Planning is One Big Math Problem

Mike about Money | Retirement Planning Math

Financial Planners give important advice for successful Retirement Planning.

More than half of workers 60 years old or older say they are postponing retirement plans, according to a new study by employment site CareerBuilder. Four out of 10 workers said they don't think they can retire until at least age 70. The biggest reason is uncertainty over how much money is needed to retire.

Retirees concerned about running out of money often fret about how inflation can ruin their plans. While that’s understandable, it’s also possible that their worries are misdirected.

“The No. 1 disaster that hurts people in retirement is not inflation,” says Brian Decker, a financial planner and founder of Decker Retirement Planning Inc.

“Instead, it is stock market crashes. In fact, a stock market crash can be so devastating that it can take you right out of retirement and put you in a situation where you have to go back to work.”

Put simply, it’s a matter of math and he says that math sometimes can be problematic for retirees for a few reasons:

-Percentages work against you. If the market takes a 50 percent tumble, the climb to just get back to break even is steep. “A 50 percent recovery would not do the trick,” Decker says. “You would need a 100 percent increase to get to where you were before the crash.” Think of it this way. If you have a $100,000 investment that loses 50 percent, that drops you to $50,000. A 50 percent recovery would just give you $75,000. And when you are retirement age, you don’t have a lot of time to recover.

-Markets decline twice as fast as they rise. “One of the first things you will notice when you look at stock charts is how fast the market unravels,” Decker says. In the mid-1990s, the market went on a bull run, but it took a little more than five years for it to reach its peak in 2000, he says. By contrast, it took just 2½ years for it to lose 50 percent of its value.

-Market timing in general does not work. Some financial professionals advocate a “buy and hold” strategy, encouraging people to ride out the markets. One reason for that strategy is so you don’t miss out on the market’s best days, which can send your portfolio value soaring. “People may have seen charts outlining what the negative impact on your return would be if you miss those best days,” Decker says. “But the flipside of that is there is a positive impact on your return if you avoid the market’s worst days. You can’t miss all the worst days, of course, but the moral when it comes to market risk is that market timing in general doesn’t work."

There are approaches retirees can take with their money other than planning to hang tight in the market with a “buy and hold” strategy, Decker says.

“For one thing, you want to have cash available that you can get to in case of an emergency or unexpected expense,” he says. “You also want some accounts where there is little to no risk to your principal.

“Finally, depending on how the math works out, you may or may not need to put a percentage of your money in investments that carry some risk. At our firm, for example, we use a strategy that takes advantage of market risk in both bull and bear markets. But it’s going to behoove anyone in or near retirement to sit down with your financial professional and work the math for your situation.”

 Troy Bender, President and CEO at Asset Retention Insurance Services Inc.,  guides people who are both planning for retirement and, already in retirement, on ways to avoid running out of money and what to do if the worst case happens. Bender gives these important tips to retirement planners who want to give themselves the best chance to enter retirement in as strong a financial position as possible:

-Know when to take Social Security. If you don’t choose the most advantageous time to start drawing Social Security, you could leave a lot of money on the table. Several factors can come into play here depending on your personal situation, so it’s best to seek professional advice. Employees at your local Social Security office generally aren’t equipped to give you that kind of advice.

-Live by the “Rule of 100.” This is critically important. In the investing world, the “Rule of 100” says that the percentage of a person’s portfolio that should be in stocks should be equal to 100 minus their age. So, for example, someone who is 60 should have 40 percent of their portfolio in stocks and the other 60 percent should be in bonds or other lower-risk investments. “If you aren’t living by the ‘Rule of 100,’ you should be, especially if you are 50 or older,” Bender says.

-Plan for long-term care. A person who turns 65 today has nearly a 70 percent chance of needing some type of long-term care services at some point, according to the U.S. Department of Health and Human Services. The cost can be devastating, so it’s important to plan financially for this likely eventuality. One option is long-term care insurance. “Sometimes people expect a family member to take care of them in these situations, but I encourage people not to be a burden to someone else,” Bender says.

Here are some great books to help you plan a stress-free retirement:

Retirement Planning in 8 Easy Steps: The Brief Guide to Lifelong Financial Freedom by Joel Kranc

Retirement Planning in 3 Easy Steps - Dream It. Plan It. Live It. by Laura Kokesh

Retirement Planning Made Easy: A simple yet powerful step-by-step approach to a safer, more secure retirement income by Diane Marra