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Health & Fitness

Rethinking Retirement Income Strategies

The good news is that due to rapid advances in the medical world many of us can expect to live longer than past generations. But that presents a challenge: To support longer lifespans our investment portfolios must be properly structured so we have the assets to cover our needs.

It’s a balancing act, of course. Being too conservative or too aggressive may be a detriment to achieving our retirement financial goals.

Traditionally, retirement portfolios were often invested conservatively, focusing primarily on capital preservation and safe income rather than growth. But for many, it’s time to re-think the approach to retirement investing.

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Consider the following that are impacting investment strategy which may cause some investors to outlive retirement assets:

  • Low Interest Rates: Not long ago, a conservative portfolio consisting primarily of fixed income had an expected real return that was sufficient to support a 3 to 4 percent annual drawdown. However, the low-interest rate environment that we have seen over the last several years has made it much more difficult for investors following such a strategy to achieve returns above their drawdown rate. 
  • Rising Health Care Costs: The cost of health care for retirees has been rising well above the rate of inflation. While the consumer price index has averaged a 3.7 percent year-over-year increase since 1948, health care costs have been rising at a rate of 5.5 percent per year during that same time frame. Currently, health care costs consume 15 percent of a retiree's annual spending and health costs tend to escalate with age, according to government statistics.
  • Longer Lifespans: Due in part to advances in medicine and medical technology, average life spans have increased enabling people to live longer during their retirement years. Consider that 50 percent of all children born in developed countries today are expected to live to age 100, according to the respected medical journal “The Lancet.”

So what does this mean for your portfolio?

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Investors need to be more proactive with managing their nest eggs, ensuring retirement goals and objectives are reflected in their portfolio’s asset allocation.

Selecting an appropriate long-term asset allocation that matches investment goals against risk tolerance and time horizon is vital to managing a retirement portfolio that will serve one’s needs through the years. That may even mean considering larger allocation to equities within retirement portfolios to achieve retirement goals.

While some retirees or those approaching retirement may feel uncomfortable increasing their allocation to equities, history indicates that long holding periods can help to mitigate the ups and downs of the equity market. 

An analysis of annual market returns over 10-year rolling periods dating back to 1929 reveals that portfolios with equity allocations as high as 80 percent never experienced a 10-year annualized negative return. In fact, the lowest annualized 10-year return for a portfolio of 50 percent equity/50 percent fixed income was 2.8 percent. 

While prior returns may not be indicative of future results, these numbers should provide comfort that a meaningful allocation to equities is appropriate for retirees who need to plan for a long retirement time horizon.

Consulting a financial expert for a retirement account check-up is the best step to make sure you have the best balance and strategy to meet your goals throughout retirement.

Joseph Jennings, CFA, Senior Vice President and Investment Director, PNC Wealth Management has more than 14 years of wealth management experience and received his MBA in Finance from Loyola University. He is a Chartered Financial Analyst (CFA) charterholder and member of both the CFA Institute and the Baltimore CFA Society. He can be reached at joseph.jennings@pnc.com.





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