THE PERFECT STORM

In the fall of 1991 the “Andrea Gail” set sail in the North Atlantic. But as we know from the movie “The Perfect Storm,” it turned out to be a tragic event that had never before been documented in U.S. history. I wanted to talk about another “perfect storm” that is beginning to form that coincides with today’s growing number of baby boomers who are approaching retirement. The needs of this generation are rapidly changing. Asset allocation was once the most important variable in financial planning but the emphasis has now shifted to distribution planning (i.e., how will my assets provide a lifetime of income).

There are three major risks facing baby boomers today:

1. INFLATION RISK – MORE MONEY
One thing is certain: things will cost more tomorrow than they do today. Some advisors suggest that you will need 80% of your pre-retirement income in your retirement years. Some may need as much as 100%. Who would have thought that today a dollar would only buy two stamps and that gasoline is $3.25 a gallon? Home ownership is at an all-time high in this country, and many retirees continue to have a mortgage in retirement. Some of these retirees even have two: the home in Pittsburgh and the getaway in Florida. Mortgage payments and maintenance costs do not go down in retirement. The question becomes, how is your portfolio positioned to outpace inflation? You will need more money.

2. LONGEVITY RISK – MORE TIME
Longevity risk is the fear of outliving your money. With the advancements of health and medical care, life spans are continuing to increase dramatically. People are living longer today than ever before. Some retirees will actually spend more time in retirement than while they were working. There is a 50% chance that a newly retired couple will need income for over 30 years. For those of you that are newly married there is a 50% chance that one of you will reach age 92. This dramatic increase in life expectancies has put a strain on investment portfolios. We have learned from inflation risk that you will need more money in your retirement years, and with people living longer, they will need more money for a longer period of time.

3. MARKET RISK – MORE RETURN
Some people call this the “sequence of return risk” and others the “luck factor.” How is the stock market performing when you are ready to retire? Industry experts agree that if you retire in a declining market ,the probability of sustaining income from your portfolio drastically decreases. Example: Investor A retires January 1, 2000 with $1 million invested in the S&P 500 Index; he withdraws $50,000 a year, and three years later he has $518,000 remaining. Investor B retires January 1, 2003 with $1 million invested the same way. He withdraws $50,000 per year; at the end of his first three years he has over $1.3 million. Going forward, Investor A will have to withdraw 10% of his portfolio to provide the same income while investor B will only have to withdraw 4% to maintain his retirement income. This is an unbelievable difference that could have a major impact on your retirement lifestyle. I would argue that this truly is the luck factor.

More Money + More Time = More Return
Change is constant. The investment planning profession will see the largest paradigm shift in its history. Over the next 10 years over 75 million people will be retiring. This represents over 87 trillion dollars that will shift from the accumulation to the distribution phase of retirement planning. Is your portfolio prepared for the “Perfect Storm?”

Kevin C. Krul is First Vice President and Financial Advisor with Hefren-Tillotson. He may be reached at 412-258-1101 or kkrul@hefren.com. The Wexford office of Hefren-Tillotson is located at 4001 Stonewood Drive.