By Paul Harrison
Here’s an interesting statistic: Over the past three decades, the centenarian population in the United States has grown about 66%, according to the U.S. Census Bureau. Of course, this doesn’t necessarily mean that you have a good chance of living to 100 — but the possibility may not be as remote as it once was. In any case, if you do plan to retire in your mid-60s, and you are in good health, you may well have two, or even three, decades ahead of you. To enjoy this time to the fullest, and to help prevent the possibility of outliving your financial resources, you will need to invest for income and growth throughout your retirement years.
As a retiree, how much income do you need from your investments? There’s no one “right” percentage for everyone. Furthermore, you shouldn’t have to rely solely on your investment portfolio, because you may have other sources — such as Social Security and potentially your employer-sponsored retirement plan — from which to draw income. Nonetheless, your investments can play a big role in providing you with the income you’ll need during retirement.
Many retirees depend on fixed-rate investments for a good portion of their retirement income, so it’s a real challenge when interest rates are low, as they have been for the past several years. Consequently, when you retire, you’ll certainly need to be aware of the interest-rate environment and the income you can expect from these investments. Longer-term fixed-rate vehicles may be tempting, as they typically offer higher rates than shorter-term ones, but these longer-term investments may have more price fluctuation and inflation risk than shorter-term investments. Ultimately, you’ll likely need a balance between short-, intermediate- and long-term fixed-income investments to provide for a portion of your income in retirement.
While it’s important to invest for income, you can’t ignore the need for growth because you won’t want to lose purchasing power to inflation. As you know, we’ve experienced quite mild inflation recently. But over time, even a low rate of inflation can seriously erode your purchasing power. To illustrate: If your current monthly costs are $3,000, they will be about $4,000 in 10 years with only a 3% annual inflation rate. And in 25 years at that same rate, your monthly costs will have more than doubled, to about $6,200. To help protect yourself against inflation risk, you should consider having at least some investments that offer growth potential, rather than only owning fixed-income vehicles. And some investment vehicles, such as dividend-paying stocks, can offer both growth potential and current income. In fact, some stocks have paid, and even increased, their dividends for many years in a row, giving you not just income, but rising income. (Keep in mind, though, that companies are not obligated to pay dividends, and can reduce or discontinue them at any time.)
To determine the right mix of growth and income vehicles for your individual needs, consult with a financial advisor who is familiar with your retirement plans, your risk tolerance and your family situation. And it may well be a good idea to plan for a very long retirement. You may not live to be 100, but it would be a good feeling to know that you could afford to do so.
