Retirement: The Big Picture

A 65-year-old today could spend more than 20 years in retirement.

When Franklin Roosevelt set up the Social Security system back in 1935, the expectation was that anyone who made it to age 65 would be spending about 11 years in retirement. That’s about a quarter of most people’s productive working years. But people are living longer than ever these days: The average 65-year-old today can expect to spend more than 20 years in retirement. And joint life expectancies are even longer, so if you’re married, you’d better plan on 25 years—or more. If you live to the age of 90, you will be retired for 25 years, or more than half the time you spent working.

That represents a global shift in the way people need to think about their retirement planning. It no longer is enough to reach your golden years with a nest egg that you plan to spend down. In today’s demographic environment, your money will have to keep working even after you stop working.

This month marks the first in a series of newsletters called “The Big Picture,” in which we will take a step back and look at investing issues from the larger perspective. And perhaps the biggest one to look at, because of the sheer amount of time involved in it, is retirement planning.

A Way of Life

Investment advisors keep an eye on the big picture.

That’s why investment planning doesn’t end when you reach retirement. In fact, it may become even more important at that point because most people have very little else to rely on after age 65. And while people tend to become more risk averse as they get older, the very notion of risk itself becomes different in retirement.

Investment advisers tend to define risk as the chance that a certain investment will lose value over the course of a year. Investors looking at the big picture, however, see risk a little differently. For them, the biggest question is whether their portfolio will perform well enough to meet their goals. When you’re invested with a time horizon of, say, 40 years, counting both working years and retirement, what happens to a single stock within the space of 12 months is not terribly significant.

The real risk, the big picture risk, is that you are not able to maintain your primary goal in retirement, which is to live the lifestyle that you want. That requires monitoring not how a stock performs in a one-year period but how an overall portfolio, including all of a person’s assets, holds up over the course of decades.

So a key question to ask yourself as you approach retirement is: How do I derive enough income from my investments to preserve my lifestyle? We sometimes get in the habit of focusing on a number as our financial goal, but reaching some arbitrary figure is not the point. The ultimate concern is that you have a certain type of life you’re accustomed to living, and you want that to continue into your retirement. And if, as we discussed, you expect to be retired for 20 or 30 years, you need to make sure your portfolio and financial planning is set up to cover all that time.

Time to Grow

Focus on the goals of your retirement.

The key then is not to seek out growth, or income, but growth of income. Keeping your income growing throughout your retirement and sustaining your wealth long term is the best way to maintain your standard of living.

That’s the way we see things at Bernhardt Wealth Management. We keep our clients focused on the big picture, on the ultimate goals and purposes of wealth management, rather than on what CNBC is reporting this morning.

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