Can You Afford to Retire? Check Your Numbers…Again!

Plan for the worst…hope for the best!  These are wise words indeed, especially when it comes to planning for retirement. 

Many people do a reasonably good job preparing.  They engage the services of an advisor…analyze non-financial considerations as mentioned in our November 15th Blog…consider long-term care and disability issues…and work through a variety of financial projections.  Sounds good so far! 

Here’s the problem.  Many advisors (and their clients) rely on long-term investment performance assumptions that may no longer hold true.  Let’s take a closer look. 

According to Morningstar, the S&P 500 provided an average annual return of 9.9% between 1926 and 2010.  Bonds, as represented by the 5-year U. S. government bond, averaged 5.4% for the same period.  

Based on those numbers, here are compound annual returns for five different representative portfolios between 1926 and 2010: 

  • Portfolio 1 (100% stocks): 9.9%
  • Portfolio 2 (75% stocks/25% bonds): 9.1%
  • Portfolio 3 (50% stocks/50% bonds): 8.1%
  • Portfolio 4 (25% stocks/75% bonds): 6.8%
  • Portfolio 5 (100% bonds): 5.4%

For decades, these numbers appeared to be reasonable for long-term planning purposes. 

But…what happens to your plans if our reality has changed to one of lower returns and greater volatility?  Will you still be able to comfortably retire? 

To help address these questions, let’s examine the growth of a $200,000 IRA over the next ten years.  To keep the illustration simple, we’ll assume no additions or distributions during that time. 

Average Return                       Ending Balance

        2%                                         $243,799 

       4%                                         $296,049 

       6%                                         $358,170 

       8%                                         $431,785 

      10%                                        $518,748 

Again, this is a simplified example, but it clearly illustrates the impact of unfavorable average annual returns. 

Has our reality changed?  Will we experience lower returns over the longer-term?  Nobody knows.  That’s why…just in case…plan for the worst…hope for the best!  Call your advisor today. 

As Robert Burns wrote, “The best laid schemes of mice and men/Go oft awry.”


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