Long-term Investing for the Retired Individual

As baby boomers reach their late 50s, their financial needs change.  No longer will they be channeling cash savings into retirement accounts, personal portfolios or homes.  Instead, they will be looking at what they have collected from a lifetime of work or from inheritance and wondering whether it will be enough to support them for the next one-third of their lives.  Increasing life expectancy (25 to 30 years for the average 60-year old retiree) has many benefits, but also puts tremendous stress on accumulated financial assets.  Looking back 3 decades, one realizes how much the world can change in 30 years and why there can be no simple approach to making certain you outlive your financial resources.  Unfortunately, many individuals in their late 50s and 60s are poorly prepared to make decisions that can lead to successful investing and, instead, tend to think in traditional risk-adverse terms.  They do not realize higher life expectancy requires greater risk taking.  Retirees must continue to play offense, not just defense.

To achieve financial success, retirees should employ professional investment advisors who can keep them invested during turbulent times and exercise caution when speculation is in favor.  Trying to manage your own investments can be too emotional and usually results in costly missteps.  Your asset allocation must meet your investment needs, but should also take into account your emotional well-being.  Once established, your asset allocation should be maintained, even under severe conditions such as we have experienced in 2000 - 2002. 

When budgeting for retirement, investors should use the total return concept in calculating how much cash can be drawn annually from their portfolios to meet living expenses.  The total return approach is founded on the concept that common stocks provide two investment returns—capital appreciation and dividends—and, that over the long term, capital appreciation is the more significant return.  Common stocks have historically provided an average annual return of around 10%, with 2% to 3% of that return coming from dividends.  Taxable bonds generally yield between 5% and 7%.  The total return strategy allows a retiree to seek the best common stock investments without being restricted by dividend needs.  Also, asset allocation can be tilted more to common stocks, thus lengthening the life of your capital.  Under most circumstances, common stocks should be 60% to 75% of a retiree’s investments with the remaining percentage in bonds.  Annual withdrawals should be kept to between 4% and 6% of the preceding 3-year average market values of your portfolios and is usually divided into 12-equal monthly distributions.  The total return formula has been adopted by most institutions as a budget mechanism for their endowment and is similarly useful for retirees. 

If you have any questions, please call Ned, Sarat, or Doug at 212-262-7670 or e-mail us at info@dclaonline.com.