I just received my quarterly report from Fidelity Investments which has a pretty good article by Nate Hardcastle on ways to avoid risk and the steps to help manage it.   Fidelity has a superb research unit and its report, “Beyond Conventional Wisdom: New Strategies for Lifetime Income,” is quite important when you are advising retirees, especially about the area of risk management.   Retirees, as you already know, pretty much draw from their various savings and retirement accounts a certain amount each year to meet their expenses, which, as you also know, keeps rising so that there is left a rather small amount in which to generate any income. Then, you have to add to that the increasing life expectancy so that many financial planners today when talking to a 65-year old aimed at retiring now spins life out for another 30 years.

According to Fidelity, a 65-year old that is in reasonably good health, has a one-in-four chance of living to 92. What this means is that with health care rising rapidly and inflation eating away at a person’s savings, Fidelity estimates that the average 65-year old retiree will need about a quarter of a million dollars in savings to even supplement Medicare.   Ouch, you say? Yup!   So, keep in mind that whatever withdrawals your clients are making to pay their bills will reduce the lifespan of those savings. The key here is to figure out what withdrawals can be made so that the assets last longer than retirement. I know of friends who want their money to outlast them by one hour.   Fidelity points out that if the client withdraws just four percent a year from a typical retirement portfolio (whatever typical, of course, means), then that withdrawal will give the portfolio a 90 percent chance of lasting for 33 years. That should cover the 30-year spinout, but suppose the client decides to withdraw eight percent annually? Well, that same portfolio will now have a 90 percent chance of lasting only 15 years. Double the withdrawals, halve the years.   According to Mr. Hardcastle, “Maintaining investment growth, preparing for health care costs, and planning for a sustainable withdrawal rate can help you navigate retirement’s risks, while enjoying its many rewards.”   Exactly!

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