Investors can’t retire until they’ve saved enough money to meet their expenses and maintain their lifestyles once their earning years have passed. To determine if they’re ready — and what to do if they’re not — their financial advisors will have to perform a cash flow and income analysis ideally long before any decisions are made.
Generating Income to Fill the Savings Gap
A hypothetical investor who spends $100,000 a year would need $3 million over time if he or she retired at 60 and lived to be 90. What if that investor had saved only $1 million for retirement? The investor's financial advisor would have to find a way to generate $2 million to fill the gap through supplementary income sources, including:
- Social Security
- A pension
- Income-producing investments such as bonds
- Income from principal on growth investments like stocks
When Retirement Income Isn't Enough
Sometimes, a pension, Social Security or other retirement income will only fill part of the gap. In these cases, it is up to the retiree to take action to make up the difference. The four options are:
- Earn more
- Save more
- Spend less
- Take more risk
The problem is that none of these actions take into account the likelihood of a market crash, like the one that saw millions of people lose half their savings in just two years between 2007 and 2009. If a stock market crash like that — or a string of stock market crashes like 8 similar events that occurred between 1896 and 1942 — happens at or near the investor's date of retirement, that investor will face a very bleak picture.
There are, however, two other options. Investors could lose less in crash markets and they could replace — or at least supplement — over-diversified investment products with investments in individual companies that could potentially grow faster than their diversified averaged out brethren.
Some investors have all the savings they need to maintain their lifestyles and meet their expenses no matter how long they live past their earning years. The majority, however, will have to earn supplementary income to fill the gap between what they have and what they need.
There are things we should all be exploring and implementing now, before that next crash happens. Don’t take it for granted that everything is ok, and the status quo will work the next time. Act now and see if your portfolio, advisor or firm operates the 2 methods mentioned above. If not it’s time to consider a change.
Article tracking number 1-511385