Our featured article of the month, Does Your Portfolio Fit Your Lifestyle?, delves into the understanding that retirement income planning, while numerically driven, can largely be influenced by lifestyle. After non-discretionary expenses are covered, choices made within the discretionary income expenditures are focused on the goals and wants of your desired existence. Understanding your desires and expected outcomes beforehand and thus expressing them during the planning process, should result in a more enjoyable and fulfilling retirement experience.
Additionally, securing a strong base of guranteed income provides a feeling of security and piece of mind about the future, especially amongst retirees, This likely explains why “about nine in 10 Americans (89%) who personally receive Social Security benefits have a very or somewhat favorable opinion of the program”.1 It likely also explains why retirees with a pension report having a very high confidence in retirement surveys.
Most portfolios are constructed based on an individual’s investment objective, risk tolerance, and time horizon. Using these inputs and sophisticated portfolio-optimization calculations, most investors can feel confident that they own a well-diversified portfolio, appropriately positioned to pursue their long-term goals.1
However, as a retiree, how you choose to structure your spending and lifestyle in retirement may be the most important factors to consider when building your portfolio.
New retirees sometimes worry that they are spending too much, too soon. Should they scale back? Are they at risk of outliving their money? This concern may be legitimate. Some households “live it up” and spend more than they anticipate as retirement starts to unfold. In 10 or 20 years, though, they may not spend nearly as much.
By The Numbers
The initial stage of retirement can be expensive. The Bureau of Labor Statistics figures show average spending of $70,570 per year for households headed by pre-retirees, Americans age 55-64. That figure drops to $52,141 for households headed by people age 65 and older. For people age 75 and older, that number drops even further to $45,820.1
Spending Pattern
Some suggest that retirement spending is best depicted by a U-shaped graph — It rises, then falls, then increases quickly due to medical expenses.
But a study by the investment firm BlackRock found that retiree spending declined very slightly over time. Also, medical expenses only spiked for a small percentage of retirees in the last two years of their lives.2
Starting a Business?
Using retirement funds to start a business entails significant risk. If you choose this path, you may want to consider reducing the risk level of your investment portfolio to help compensate for the risk you’re assuming with a new business venture.
Since a new business is unlikely to generate income right away, you may want to construct your portfolio with an income orientation in order to provide you with current income until the business can begin turning a profit.
Traveling for Extended Periods of Time?
There are a number of good reasons to consider using a professional money manager for your retirement savings. Add a new one. If you are considering extended travel that may keep you disconnected from current events (even modern communication), investing in a portfolio of individual securities that requires constant attention may not be an ideal approach. For this lifestyle, professional management may suit your retirement best.2
Rethink Retirement Income?
Market volatility can undermine your retirement-income strategy. While it may come at the expense of some opportunity cost, there are products and strategies that may protect you from drawing down on savings when your portfolio’s value is falling—a major cause of failed income approaches.
1. Diversification and portfolio optimization calculations are approaches to help manage investment risk. They do not eliminate the risk of loss if security prices decline.
2. Keep in mind that the return and principal value of security prices will fluctuate as market conditions change. And securities, when sold, may be worth more or less than their original cost. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
What’s the best course for you? Your spending pattern will depend on your personal choices as you enter retirement. A carefully designed strategy can help you be prepared and enjoy your retirement years.
1. Bureau of Labor Statistics, 2023
2. BlackRock.com, 2023. (Based on a 2017 landmark study that looked at retirement spending.)
Past performance does not guarantee future results. Individuals cannot invest directly in an index. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.