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WEALTHGUARD FINANCIAL ARCHITECTS Advanced Annuity Retirement Planning |
"IF EVERYONE IS THINKING THE SAME THEN SOMEONE'S NOT THINKING"
The most popular tool in retirement planning is the standard retirement calculator. The calculator guesses average future growth rates and inflation. These guesses are plugged in together with some basic personal information, the "calculate" button pushed and a projection of our retirement finances appears!.Did you know that in 80% to 90% of the time, these standard retirement plans will fail? Take for example, a retiree who has one million dollars in his investment portfolio at the beginning of his retirement. He takes out $60,000 annually, indexed to inflation. Assume his portfolio grows 8% and inflation is 3.5% per year. In the chart below, the red line shows the outcome from a standard retirement calculator. It shows the portfolio value (the vertical scale) over time (the horizontal scale). At first glance, it appears wonderful; the portfolio seems to last.
Now, calculate the portfolio value if this person were to start his retirement in any of the one-hundred years during the last century using actual market data and inflation. Assume a conservative asset mix - 60% fixed income and 40% equity. Each black line shows the portfolio value over time for retiring in a particular year since 1900. Most portfolios expired well before the red line which is the projection of the standard retirement calculator.
In fact, this chart shows a 72% failure rate. This shows the person who is worried (but just can't seem to understand) why they feel so uneasy. Now you know better than to trust an "average rate of return"
THE PROBLEM IS THE DOWNSIDE MARKET LOSSES COMBINED WITH WITHDRAWS WILL EAT AWAY AT YOUR BALANCE AT SUPERSONIC SPEED!
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A February 28 2005 Wall Street Journal article by Mark Whitehouse reported the expectations for future stocks and corporate and government bonds for the next 44 years. While he does not describe how he chose his respondents, most of these respondents are prominent economists at top Wall Street firms. The median expected return on the stock market is 4.6%, very close to the historical experience for the international sample, much lower than the 6.5% assumed by the Social Security Actuaries. Sources: Social Security Actuaries, “Preliminary Estimated Financial Effects of a Proposal to Phase in Personal Accounts – INFORMATION,” 2/3/2005. This table reports bonds as a portfolio that is 60 percent corporate bonds and 40 percent government bonds. U.S. historical returns are geometric average returns of a portfolio that is invested 50 percent in long-term bonds and 50 percent in one year commercial paper or certificates of deposit. These data are described in Shiller, Irrational Exuberance, 2005 and available at www.irrationalexuberance.com. The international sample is the median across 15 countries (including the U.S.) of the historical geometric average real returns as compiled by Dimson et al., Triumph of the Optimists, 2002. WSJ Survey is median expectations for next 44 years of 10 economists surveyed, published on 2/28/05, in a portfolio that is 60 percent corporate bonds and 40 percent government bonds. The above information shows what the actual average rates of return historically and what a group of prominent economists surveyed by the Wall Street Journal beleive what future returns will be
This chart shows the SP500 from January 1970 to January 1990 represented by the red line, the "average rate of return was 8.21%. The green line shows an annual rate of return of 8%. The green line grew to nearly $500,000 while the red line has not reaced %400,000 yet. Which would you rather have? A steady guaranteed 8% with no swing in value beat 8.21% "average rate" of a swinging value. |
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