Baby Boomers – Living in Retirement vs. Surviving in Retirement

Hands up all those Baby Boomers who want to survive in retirement? I know I don’t. I want to live in retirement. That means not having to check our retirement nest egg every month to work out how much we can take to live on.

I don’t intend spending up big, but I do want to maintain my lifestyle in retirement.

I don’t want to wake up at night in a cold sweat wondering if I will be able to drawWorried about Protecting Your Nest Egg some of my nest egg this month because the Dow dropped 3%. This is just going to make me ill and I’ll probably die younger than I should.

The problem is that many Baby Boomers have ALL their Nest Egg invested with a financial planner. Most if not all are in Mutual Funds. So this could be their lot unless they change some things around.

Okay, I know our nest egg is probably invested in balanced, properly allocated and fully diversified funds. Everything is done according to the “book of financial planning”. But is it in our best interest when we are in retirement?

Let me explain. When we give our money to our financial planner and they invest in Mutual Funds according to our “risk profile” they distribute our nest egg into two main areas – Cash & Fixed Interest and Property, International Stocks and Local Stocks.

When I did this, call me dumb but I thought the Cash & Fixed Interest would just go up with time all-be-it with low returns – but I would get positive returns and that would balance off the riskier assets. Not so. I discovered the unit prices for these assets could go down just like the unit prices for stocks and property. Now they don’t go down as fast but they can go down. I was told they can typically vary by +/- 6.5% over time.

If all our nest egg is in these assets and they are all down (as has happened recently) we are going to be reluctant to draw an income from our nest egg during that period aren’t we? Indeed our financial planner may advise us not to take any money out until the market comes back – and we know it always does but we don’t know how long it will take. So we stay home and take up knitting until the market comes back!

This is how we get onto the Should I/Shouldn’t I treadmill about withdrawing some money. It’s this that will keep us awake at night and could shorten our life. It really means we have to watch our nest egg and only take money out when the markets are up or we have some profit in our nest egg. This is what I call surviving in retirement and it is no fun..

This is very important when we initially retire. As we get into the long run of retirement it becomes less critical because we have hopefully built up a profit buffer in our nest egg and as we get older we are likely to spend less.

Is there are alternative we can consider? Yes.

But first I have a question? If we have a conservative portfolio of say 60%/40% in fixed assets/stocks and property, why do we pay our financial planners to manage 60% of our money that is in fixed interest and could go down in value? It may make some sense when we are young because fixed interest mutual funds can provide better returns than say fixed interest at a bank because the mutual funds are being actively managed to get the best returns.

But when we are in retirement we need to reduce our costs and paying a financial planner 1-3% to manage 60% of our nest egg that is in cash & fixed interest makes no sense to me.

However the main point of managing the fixed interest portion ourselves is it can provide us with a way to pay ourselves when the markets are down and prevent us selling our Mutual Funds at fire sale prices just to survive – notice I didn’t say live.

What we should be doing is putting this money into an “income ladder” which simple means putting it into staggered longer term fixed interest deposits with banks or other institutions so we get higher interest rates over the long term. As each deposit matures we can draw the money or roll it over if we don’t need it at that time.

By all means get your financial planner to help you maximize your fixed interest returns with an income ladder. But make sure you control the money not them.

It has been suggested that we should have 3-5 years worth of income invested in an income ladder. The rest of our nest egg can stay in riskier investments to get us those long term higher returns our financial planners tells us will be there.

What does this mean?

It means we can concentrate on living in retirement rather than surviving in retirement, at least for 5 years knowing we have enough money easily accessible to us regardless of the markets. It means we can sleep at night and not have to worry about a 3% drop on the Dow. It means we will probably live longer and be happier because we won’t be stressing out every time the markets take a dive.

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