Managing Retirement Expectations

What you sometimes expect to happen in retirement may not be what you planned for. As I write this article, who would have thought that gasoline would be $4 a gallon, one-year CDs are paying about three percent, and the Dow Jones and S&P 500 index are down over 12 percent so far this year? It is impossible to predict the future, but knowing what to expect down the road can help you be better prepared.

If you are retiring today there are three main criteria you must consider:

1. PLAN FOR A LONG RETIRMENT
   Life expectancies are increasing every year. For a 65-year-old couple, there is a 50 percent chance that either you or your spouse will reach 92. As retirees live longer, healthier lives, the time you spend in retirement could be longer than the time you spent working. Your portfolio should be prepared to be around for a long time.
    

2. PLAN FOR GROWTH
   Retirees today will need somewhere between 70 to 90 percent of their pre-retirement income to have an adequate retirement income. Your portfolio will need to have growth potential to help accumulate the assets needed to maintain the lifestyle you want in retirement. Investing in growth poses additional risks so your portfolio needs to address these risks as well.
    

3. PLAN FOR PROTECTION
   Substantial market declines can have a dramatic impact on your portfolio—and your retirement plans as well. Industry experts agree that if you retire in a declining market, the probability of sustaining income from your portfolio drastically decreases. To minimize market risk, you may want to consider choosing investment products that are either less volatile or can protect your income in any market.

After identifying the three main risks retirees will face—longevity, market and inflation risk—knowing your investment options and the risks and rewards associated with each is important to the overall success of your portfolio. Your retirement plan must have the appropriate mix of financial products that are aligned with your risk tolerance, time horizon and financial goals. Here are three main investment strategies for retirement portfolios.

1. Equity Based Strategies
   Over time, equity based investments have delivered the highest return over the long term. They tend to offer greater potential for growth but there is no guarantee on how they will perform in the future. Equity values are tied to current market conditions which generally bring greater volatility.
   PROS: growth potential
   CONS: market risk, unpredictability
    

2. Fixed Income Strategies
   Fixed income products provide a ‘fixed’ rate of return for a ‘fixed’ period of time. Over time, fixed income investing has underperformed equity based investing, which is a risky strategy if you’re trying to stay ahead of inflation. The safety and stability of returns may not be enough to meet your financial needs down the road.
   PROS: less volatility, predictability
   CONS: limited long-term growth, not keeping pace with inflation risk
    

3. Insured Strategies
   During these current market conditions, insured products can be more important than ever. If you need the additional protection they offer, such as principal protection, lifetime income, minimum income payments and death benefits, you may want to look at insured strategies for a portion of your portfolio. The protection insured products offer come at a price that is typically higher than other investment products. (Remember - cost is only an issue in the absence of value). Your financial advisor can help determine if an insured strategy is right for you.
   PROS: growth potential, predictable, income protection from market declines.
   CONS: additional costs

The most important part of retirement planning is understanding your options. Maintaining the appropriate mix of investments strategies can help minimize risks while helping you achieve your long-term retirement planning goals. Product allocation can be just as important as asset allocation during your retirement.

As always, remember everyone’s situation is different and you should always consult your personal financial advisor before taking any action. If you would like to learn more about Hefren-Tillotson’s Masterplan process or attend our upcoming workshop, Retirement Expectations on August 21 at 7 p.m. at Walnut Grove in Wexford, please contact my office at 412-258-1101 or e-mail me at kkrul@hefren.com.

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.