3 Ideas to Plan For Lower Returns

3 Ideas to Help Plan for Lower Returns

What we earn on our nest egg is a key component to our future plans. Over the past month, we talked about the potential impact of both lower bond and stock returns. What can you do to prepare for this? Today we’ll share 3 ideas to help you plan for lower future investment returns.

Watch Now: 3 Ideas to Help Plan for Lower Returns

3 ideas to help plan for lower returns

Listen Now:
3 Ideas to Help Plan for Lower Returns

Subscribe Where You Find Your Podcasts

3 ideas to plan for lower returns

Check out the other episodes from this month...

All month long, we’ve talked about the possibility of lower future returns for both stocks and bonds.  

What happens if future returns are less than historical averages? Bond yields indicate the future results from those investments could be well below their averages. And many “experts” believe future stock returns could also be less. This combination creates some significant challenges as you head into retirement.

Here are 3 things you can do to plan for lower future returns.

1. Delay Your Retirement

blank

Delaying your retirement improves your Social Security and pension benefits (if you will receive a pension). This works three different ways.  It shrinks the discounts you face for early retirement.  It increases your primary benefit. Or, with Social Security, you can receive delayed retirement credits. 

Waiting to retire also helps solve a problem with health insurance in retirement.  You are eligible to receive Medicare at age 65.  This means you won’t have to buy an expensive individual health insurance policy. 

Delaying retirement also allows you to reduce debt, save more, and benefit from compounded returns.

2. Monitor Your Spending

blank

In my experience, the primary reason people run out of money in retirement is overspending. The more you withdraw from your nest egg, the higher the chance you deplete your savings. Take a good look at your retirement budget. Try to find expenses or costs you can eliminate.

3 ideas to help plan for lower returns

3. Own More Stocks

blank

Investing involves a trade off. Trying to earn more can mean the short-term shocks are more severe. But, it may be necessary to consider an allocation that provides more opportunities for long-term growth. This may be hard to do, considering we haven’t completely recovered from a pretty steep drop. But in the long-run, the risks could be worth it, even if it is for a short period of time.

Be Flexible

It is important to be flexible.  The plans you created may need to be adjusted as the world around us changes.  None of us know what future returns will be.  But we need to consider what happens if future returns are lower.  Making good decisions now can help improve your chances for longer term success.  And, if things turn out better than expected, everything will be fine.

3 ideas to help plan for lower returns
3 ideas to help plan for lower returns

 

Don’t Miss An Episode

Get every episode of Monday Morning Money in your inbox.  Join our mailing list.

Subscribe Where You Find Your Podcasts

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

Is the 4 Percent Rule Dead?

Is the 4 Percent Rule Dead?

Over the past two weeks, we’ve discussed expected future returns for both stocks and bonds. Several experts feel the future results will be much lower than historical averages. So that makes us wonder, “Is the 4 percent rule dead?”

Watch Now: Is the 4 Percent Rule Dead?

percent rule 4

Listen Now:
Is the 4 Percent Rule Dead?

Subscribe Where You Find Your Podcasts

4 percent rule

Lower expected future returns for both stocks and bonds can affect your retirement. Many “experts” expect stocks to produce below-average returns over the next decade. They forecast somewhere in the neighborhood of 6.5% per year. They also expect lower returns from bonds—somewhere between 1 and 2 % per year.

Lower Future Returns and the 4 Percent Rule

If these lower returns happen, it can create a major challenge for retirees. If these predictions hold, a well-balanced portfolio would earn somewhere between 4% and 5% per year.

Is the 4 percent rule dead

For the past 20 years or so, we’ve been big believers in the 4% rule for generating retirement income. This rules says you can take 4% of your retirement savings as income. So if you have a $500,000 nest egg, that translates to $20,000 per year or $1,666 per month.

Why Do We Believe in The 4 Percent Rule?

We use this guideline because it reduces the risk of running out of money during your lifetime. This has been back-tested during some of the biggest bear markets, and it has a high rate of success.

When you use historical return data, you can see why. Historical data shows a 60% stock-40% bond portfolio should grow by about 7% per year. So if you only take 4%, you would expect your account to grow by 3% per year. That’s enough to help your income grow each year to maintain your purchasing power.

What if Returns are Lower?

But what happens if the experts are right? What if those returns are less than average? Does the 4% rule still work?

In theory, if you earn at least 4% per year, you can take that much income and still maintain your principal. But there are a couple of things that come to mind. First, your odds of success will decrease a little. And, your ability to grow your principal to grow your income is also limited.

The second thing: what if you need to take more than 4% from your savings?  A lower return environment going forward means you will increase the risk of running out of money during your lifetime.

Balancing Risk and Reward

Financial planners always talk about balancing risks and rewards. And the amount of income you take from your retirement savings is a perfect example. The 4% rule is simply a guideline to help you think about that risk. And even with lower returns expected in the future, it still has merit.

No matter what future returns are, one thing remains true. The higher your withdrawal rate, the more you risk running out of money. If you are unsure of how this impacts you, talk to a financial planner.

Click here to subscribe
4 percent rule dead
4 percent

 

Don’t Miss An Episode

Get every episode of Monday Morning Money in your inbox.  Join our mailing list.

Subscribe Where You Find Your Podcasts

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

How Lower Interest Rates Affect Your Retirement

How Lower Interest Rates Affect Your Retirement

Lower interest rates create some obvious problems for retirees. Things like savings accounts and CD’s just aren’t earning much. But there is a longer-term problem with these low yields. Today, I’ll discuss how lower interest rates affect your retirement.

Watch Now: How Lower Interest Rates Affect Your Retirement

how Lower interest rates affect your retirement

Listen Now:
3 How Lower Interest Rates Affect Your Retirement

Subscribe Where You Find Your Podcasts

How Lower Interest Rates Affect your Retirement

For many, bonds are a significant part of your retirement nest egg. And, in my mind, there are three reasons to use them.

Reason 1: Less Volatility

Bonds reduce volatility. Think about what happened in March. The stock market fell over 30%. If you were 100% invested in equities, your account went down a lot! If you had 40% in bonds, the drop was much smaller.

Reason 2: A Place to Invest Your Future Income

Bonds give you a source of funds to generate your income. Selling stocks when they are down 35% to get your monthly check isn’t ideal. Putting your future income in bonds solves this problem.

Reason 3: A Way to Rebalance

Bonds give you a source of funds to buy stocks at better prices. Let’s say we get another big drop in the stock market in the next few months. I’m not saying we will, but if we do, you have a source of funds to buy stocks at those lower prices.

How Lower Interest Rates Affect Retirement
Click here to subscribe

Lower Risk, Less Return

Owning bonds will reduce your future long-term returns. They just don’t generate the results stocks do. For example, the Vanguard Total Stock Market Index fund has averaged just over 9% per year over the past 15 years.  The Vanguard Total Bond Market Index fund has averaged 4.3% over the same time frame.  Adding more bonds reduces the impact of a bear market.  But it also reduces your future returns.

blank

Low Yields Translate to Lower Future Returns

Last week, we talked about lower expected returns for stocks and how that impacts your retirement.   The current low yield environment also means we should expect lower future returns for bonds too.

In fact, Vanguard recently said we should expect bonds to generate returns of about 1-2% per year over the next decade. 

So if we expect stock market returns of 6.5% and bond returns of 2% here’s what happens.

This is a real challenge when you need your savings to create income and grow to keep pace with inflation.

Lower interest rates and yields could have a major impact on your retirement plans.  It’s worth having a conversation with a financial planner to see how it could affect you.

What do you think?  Add your comments below!

Lower Interest Rates Affect Retirement

 

Don’t Miss An Episode

Get every episode of Monday Morning Money in your inbox.  Join our mailing list.

Subscribe Where You Find Your Podcasts

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

How Does Your Age Affect Your Retirement?

Last week we asked the question, “Will your retirement savings last 23 years?”  Today we ask, how does your age affect your retirement?

Video: How Does Your Age Affect Your Retirement?

Plan for A Better Retirement

We created Monday Morning Money with one goal in mind.  Give you information to inspire you to plan for a better retirement. 

We publish a new episode each week.  And, we will deliver it right to your inbox.

Don’t miss an episode, subscribe today!

Get Free Weekly Tips!

* indicates required

How Does Your Age Affect Social Security?

We are eligible to begin Social Security retirement benefits at age 62. But if we retire before our normal retirement age, our benefits get discounted. The discount can be as much as 30%.
 
Delaying Social Security beyond normal retirement age means larger benfeits. Each year we delay, our benefits increase by 8%.
 
The income you need from savings depends on how much Social Security you receive. If you get less from Social Security, you need more investment income. When your investment income gets too high, you increase the risk of running out of money.
How Does Your Age affect Your Retirement

A Case Study: John and Patty

John and Patty are both 60 years old. They have accumulated $330,000 in their retirement accounts. Between contributions and earnings, their accounts should grow by $15,000 each year.

At normal retirement age, John will receive $2,000 per month in Social Security benefits. Patty will receive $1,500.

Remember, every year everything you buy costs more.  So John and Patty will need more income later in retirement.  

Let’s see how the age they choose to retire impacts the financial parts of their retirement.

how does your age affect your retirement

Click image to enlarge

Age 62 WD Rate
A 6.5% Withdrawal rate is high. It increases the risk of running out of money.
 
What happens if they wait?
Age 65

Click image to enlarge

Age 67 WD Rate

Better, But Still Not Ideal

Waiting an additional 3 years does two things.  It reduces the Social Security discount.  And, it gives them a chance to save more.

As a result, they need less income from their savings. And because they have more in savings, the withdrawal rate is better.  But it still isn’t ideal.

Age 67

Click image to enlarge

Age 67 WD Rate

That's Much Better

Now both John and Patty receive their full Social Security benefit.  And the additional years of compounding also help.  Now the withdrawal rate is 4%, which has a higher probability of success.

For good measure, let’s look at what happens if they wait until age 70.

blank

Click image to enlarge

Age 70 WD Rate

How Does Your Age Affect Your Retirement?

Time can be your greatest asset. And this is especially true if you aren’t as prepared for retirement as you hoped to be.

Early retirement discounts in Social Security benefits work against you. It places more responsibility on your nest egg for your income needs. And we believe the biggest threat to your retirement savings is your withdrawal rate.  

If you are able, working a few extra years should improve your retirement picture.  Those early retirement discounts disappear.  And the extra time you have to save won’t hurt either.

Watch Other Episodes of Monday Morning Money

Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

3 Ideas to Plan For Lower Returns

3 Ideas to Help Plan for Lower Returns What we earn on our nest egg is a key component to our future plans. Over the past month, we talked about
Read More

Is the 4 Percent Rule Dead?

Is the 4 Percent Rule Dead? Over the past two weeks, we’ve discussed expected future returns for both stocks and bonds. Several experts feel the future results will be much
Read More

Things continue to improve…

Things continue to improve The pandemic shut down our economy earlier this year. Now America is slowly reopening. Here are some charts and data showing that things continue to improve.
Read More

How Lower Interest Rates Affect Your Retirement

How Lower Interest Rates Affect Your Retirement Lower interest rates create some obvious problems for retirees. Things like savings accounts and CD’s just aren’t earning much. But there is a
Read More