New York, NY (PRWEB) April 02, 2013
The questions abound: will retirement investments perform well? Will the money last? Asking the right questions seems easy; however, the answers may be more complex.
“Many investors believe their aim should be to save a given amount—a magic number,” says Steven Abernathy, Chairman and co-founder of The Abernathy Group II Family Office. “Rather than aiming to save a particular total, it’s vital to consider how that total is going to be part of your retirement plan. There are two schools of thought: 1) acquire enough principal to live on its interest at 7%, or, 2) spend down annually. Don’t underestimate the importance of advance planning—it can save headaches down the road.”
The first strategy of living off 7% principal works as long as it's enough to cover spending. Inflation, stagflation (the occurrence of a recession and high inflation due to the government infusing the money supply with extra cash), taxes, fluctuations in portfolio investments and other variables taken into account mean this isn’t guaranteed. Diluting the money supply may be a macroeconomic band-aid; however, it can be a whopper for the retiree and may affect the classic “spending down” model.
“Investors easily forget that the moment they begin spending down their principal, not only is their nest egg diminishing, but, the earned interest is significantly less,” says Brian Luster, Principal and co-founder, “Inflation and stagflation usually equate to spending more for the retiree—so it’s important to allow for variables as much as possible in your retirement plan.
An investor has saved $1M for retirement. He requires $84,000 per year to support his ordinary living expenses ($7,000 in monthly expenses). Many investors believe simply earnings 7% per year will be sufficient in order to accomplish this, without drawing down principal. However, this is not the case. Remember, the investor must pay taxes on his 7% earnings, or if this is in a retirement account, must pay taxes on his withdrawals. Even at a 15% tax rate, principal will degrade to $600,000 by age 75. By age 84, the investor is broke. (Note: The 7% earnings in our example exceeds present market rate; 30-year investments currently earn around 3% today.)
Here is an example of what can be achieved when planning starts early.
Investors who want to maintain their standard of living need more, yet, many have become increasingly cautious—not surprising given the global economic picture. History tends to repeat itself, yet, investors don’t always listen. 1929, 1973, 1980, the early 2000’s, and 2008, to name a few periods in the past 100 years, brought economic fluctuation which affected a wide breadth, yet, the average investor still does not always “recession proof” retirement savings.
General wisdom encourages investors to save: maximize 401K plans (especially if they’re matched) and take advantage of pre-tax plans such as a Roth IRA. As investors age, generally risk is not encouraged. But, is there such a thing as “too conservative?” Low interest rates will bring in lower returns and may diminish an investor’s purchasing power. According to the U.S. Labor Department, there was a 39% loss in purchasing power between 1991 and 2011. If this trend continues, it is likely to reduce the standard of living for retirees and affect even those who have amassed millions.
So what are the alternatives?
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About The Abernathy Group II Family Office:
Steven Abernathy and Brian Luster co-founded The Abernathy Group II Family Office and the country's first Physician Family Office (PFO). The Abernathy Group Family Office sells no products, receives no commissions, and is independent, employee-owned, and governed by its Advisory Board comprised entirely of thought-leading professionals. They are regular contributors to several publications and blogs including The Huffington Post.