I think that the American public has largely tuned out the myriad studies showing that most households are woefully under-saving for retirement. Even if we’d prefer not to think about this issue, however, it is crucial to regularly check on how we are doing. There are two major questions. First, during your working years, are you saving enough? Second, during retirement, how much income can you sustainably plan to draw from your savings each year? The good news is that there are some simple tools that you can use to do a fast estimate of how you are doing, how much you need to save to stay on track, or how to get on track. Continue reading
Generating Income: Part Four of Our Special Five Part Series
During their working years, investors focus on saving and investing with a goal of building wealth. As they enter retirement, either by ceasing paid employment entirely or by scaling back paid employment, investors shift their focus to using their portfolios to provide a reliable long-term stream of income. This transition from building wealth to income generation is the subject of a great deal of research in retirement planning. Once investors are at or near retirement, the most significant financial challenge is using their accumulated savings to provide substantial income for their retirement years. Continue reading
The Wall Street Journal’s recent article, “Same Returns, Less Risk” discusses different approaches to managing portfolio risk while maintaining exposure to potential returns available from stocks and other riskier asset classes.
If you are a Portfolioist reader, you know that we’ve written about the importance of risk budgeting in the past (see, “Risk Budgeting: A Critical Tool for Portfolio Management”). You also know that we believe that risk budgeting is an important part of successful long-term investing. That’s why we constructed our line-up of Target Date Folios using a risk budgeting approach—and this stands in stark contrast to the strategy used in more traditional Target Date Mutual Funds that generally use static asset allocations that don’t adjust their risk allocations in volatile market conditions. Continue reading
Stacy Schaus, Executive Vice President at PIMCO and her colleague, Ying Gao, recently wrote a white paper titled, “Loss Capacity Drives 401(k) Investment Default Evaluation” that tackles some of the most important issues in retirement planning. The white paper discusses the development of asset allocation strategy over an investor’s working years and into retirement. (Schaus has worked on this problem for years and has written a book called Designing Successful Target Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path on this topic).
While the white paper covers a number of elements of the life cycle asset allocation problem, I’d like to focus on one in particular: How much can a 65-year-old investor approaching retirement really afford to lose? Continue reading
In a recent interview in The Wall Street Journal titled “Bad New for Boomers,” Rob Arnott presents a fairly grim view of the retirement income that investors can expect to generate from their investment portfolios. His thesis is that aside from all of the economic turmoil that may constrain future earnings growth, there is an additional substantial problem for investors: supply vs. demand. As the Baby Boomers retire, they will become sellers of equities as they draw down their life savings to provide retirement income. Having this huge generation steadily cashing out of the market, will increase the balance of sellers vs. buyers of equities and will thereby drive down equity prices.
It is crucial for investors to understand that Continue reading
One of the most important variables in creating an investment strategy to meet a specific goal (such as retirement) is what you assume about the future returns from stocks, bonds, and other available investment opportunities. Another highly important input to planning is your estimate of the risk associated with each investment alternative. These estimates of future risk and return will determine how much you need to save, when you can expect to retire, and how much income you can expect in retirement. Where do these estimates come from? Continue reading