10 Point Reality Check on Long Term Nest Egg Survival for Baby Boomers

Here are a few points I jotted down that Baby Boomers need to consider to ensure the Long Term Survival of their nest egg. They need to put plans in place to deal with the unexpected by limiting losses and minimizing fees, at the very least.

1. Australian Funds Returns from Balance Funds average 6.9% negative, according to the press if you can believe that. How do your nest egg results compare?

2. For Baby Boomers in Retirement the loss is far more significant if they add inflation 4% and fees of say 2%. They are down 13% for the year – not 6.9%.

3. Its not the fact that losses occur as Fund Mangers tell us every 5-7 years and we should not be concerned. (Why don’t they protect us if they know this?)

4. It’s the size of the losses and the time to recover when drawing a pension that is important.

5. A Pension of 4% is suggested by most experts. This represents a loss to your retirement capital every year of 4%.

6. In 2000-2003 in the USA Baby Boomers retiring in 2000 lost up to 40% of their nest egg by 2003. It took until late 2007 to get their money back, only to be hit again with more losses now.

7. The problem is aggravated when your funds have to earn 4% for inflation, 2% for fees and 4% to pay a pension and still try to preserve capital at least for the early years.

8. For example if you lose 10% of your nest egg in retirement with inflation at 3% and a pension of 5% you will need a 23.7% return on funds to recover in the first year, or 10% per year to recover over 5 years. This compares with only 11% and 2% respectively if you are not taking a pension.

9. It is easy to rationalise that 4 years of around 16% a year growth is not bad and you should not worry about 1 bad year.

10. If you are a retiree you need to be concerned because:

  • You don’t know if it is just one bad year or not
  • You don’t know how much you are likely to lose if you are a buy and hold investor
  • You don’t know how long the downturn will last before you start to get significant returns to make up for the losses.
  • If you don’t get any returns your nest egg is still being eaten by inflation and fees perhaps up to 6% or more per year.
  • You are not adding to your nest egg to replenish it for the losses either.
  • Baby Boomers cannot operate on a basis of holding out for the long term if their nest egg is all they have put by to live on. The day we retire our long term is just starting. Losing 40% of our nest egg in the first 3-4 years will almost guarantee our nest eggs will not survive long term.

A recent survey from Mercer Financial found that 72% of Baby Boomers in Australia expected their nest egg to be higher this year. With respect what planet have they been living on? They should have their Retirement Funds End of Year Performance Reports by now. I hope it will spur Baby Boomers on to meet with their financial advisers and take control of their nest egg.

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