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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

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When Can You Retire?

Many times throughout the years, I have told Carol I want the "option" of being a greeter at Wal-Mart—I don't want to be "forced" into it because my retirement funds don't stretch far enough.

This conversation was brought up again when Bob Benmosche, the CEO of insurance company AIG, said people need to work until they are 70 or 80 years old. Upon hearing this, Carol said to me "Wow, 80 years old—if normal retirement age is 65 and this guy thinks people need to work until 80—what happens to all of the people who retire at 55 or 60?" Hmmmm....good question.

At the root of Benmosche's comment are two issues.

First, funding retirement is a mathematical equation. The longer you work and save, the less you rely on investments to carry you in your later years—and once you retire the further your savings can carry you in your twilight years.

Secondly, the time frame for retirement is a moving target for every generation. When Social Security was first implemented in the 1930's the average life span was a mere 62 years. However, with advancements in health and medicine the average life span is now in the 80's. In fact, if a husband and wife both make it to age 65 the odds are that one of them will live into their 90's.

For every four to five years we live, the average life span is increasing by one year. For me, at age 45 today, my expected life span will quite possibly be well into my 90's, if not 100!

Again, the simple math shows the longer you live, the more you must save and work. If I can expect to live to 100 I better be very wise with my finances.

Making matters worse, the traditional financial planning models are very outdated for today's investment climate. Twenty years ago a retiree would normally position about half of their money in diversified stock market investments and the balance in fixed income. The fixed income portion could be relied upon to produce about 6% interest per year.

With the ten year US Treasury currently paying a slim 1.5% interest (before income taxes) retiree's cannot expect to earn 6% on the fixed income portion of their portfolio.

If inflation were truly zero, maybe very conservative retirees could get by on 1.5% interest—but that is not the case. Although the government tells us inflation is running about 2.7% currently, we estimate it is more like 4% or 5%. This puts a significant headwind in front of your portfolio.

Assume a frugal retiree has squirreled away a million dollars and it's invested very conservatively. After paying Uncle Sam his cut and factoring 5% inflation, the conservative decision may actually reduce your purchasing power 3.5% per year.

At first, it doesn't sound like much. The first five or ten years of retirement are great. However, if your portfolio experiences 3.5% inflation for ten years your purchasing power is reduced by 30%. After 20 years the amount of goods and services you can buy will be cut by 51% and after 30 years your purchasing power is slashed by 65%.

A final consideration is that once you retire, your skill set quickly becomes stale. If you retire at age 55 and decide to return to the workforce at age 60, workers often realize the jobs market has moved past them making it virtually impossible to jump back in and replenish your portfolio.

Knowing this, the smart investor will save more and work longer recognizing that it is better to die with too much money than to live with no money.

Originally published Tuesday, July 20, 2012
Victoria Advocate