Make sure your retirement money will last

We're living longer! That's both good and bad news. If life really begins at 40, this news means more of us will be enjoying life-a lot longer. It also presents financial planning challenges we will be forced to deal with.

Currently, there are around 65,000 Americans over 100 years old, this number is expected to more than double by 2010 and reach over 5 million by the turn of the next century. To bring this a bit closer to home, if you're 65 chances are you'll be around another 18 years and many will live longer.

You can go down to your local drug store and buy a birthday card for someone turning 100. In fact, Hallmark recently started making 75th wedding anniversaries cards.

Financially speaking, this means we must plan for a much longer retirement and invest our money with the idea it must last 30 to 40 years.

Traditionally, most Americans have relied on Social Security and a Company pension to provide most of ones retirement income, with our investment or retirement accounts supplying additional income. Recent trends show more companies moving away from traditional pensions in lieu of 401k plans and many experts predict the Social Security system will be upside down by 2018. This heightens the need for future retirees to take on the responsibility for saving and investing “themselves” in order to meet their long-term income needs.

Additionally, as medical insurance becomes more expensive, many employers have been forced to reduce benefits not only to their employees, but to their retirees. Many retirees living comfortably on their pensions have run into trouble because of unexpected medical and Long-Term Care expenses. These costs are typically large and can easily throw a monkey wrench into one's retirement income plans.

For most investors the vehicles of choice are Annuities, 401k's and other retirement accounts. These are designed for the retirement oriented investor and also provide tax advantages, which help them grow more efficiently.

The main defense an investor has against running out of money later in life is

1.) Growing a larger nest-egg and 2.) Investing your money properly.

In past articles I described the relationship between how our money is diversified (stocks, bonds and cash) and the income or withdrawal rate we receive from your investments. The idea is to determine the probability of our money lasting throughout retirement, without running out.

If your one of those depending on your investment and retirement accounts to supply needed income during your retirement years, it's imperative that you take into account the potential of a long life, and invest your money with the idea that it must last.

In order to determine the optimum way to invest client's retirement accounts, many investment professionals use a “Monte Carlo Simulation”. This analysis looks at various portfolio diversification options and yearly income amounts. It considers thousands of different market scenarios, which take in to account volatility and returns. It's important to remember, the key to a long-term consistent income stream is not just your portfolio return, but also the “sequence” of those returns. The Monte Carlo gives the probability of how long your retirement may last considering a particular stock-bond-cash mix and percentage withdrawal or income rate.

For instants, if you're planning on funding a 30-year retirement with a portfolio consisting of a 60/40 percent stock/bond mix and a 4 percent income need. You'll have an 86 percent chance of success. However, if your income need is 6 percent your chances decrease to 28 percent.

For the same 30-year plan, a 15/85 percent stock/bond mix and 4 percent income need, your probability of success is 71 percent.

You may think that playing it ultra safe by investing in CD's and bonds is the best policy. Well, you'd by wrong. If you'd have placed 100 percent of your money in bonds over the same 30 years with a 4 percent withdrawal rate, your chances your money will last is only 40 percent. Therefore, being too conservative can be just as detrimental as being to aggressive.

This analysis can be done for virtually any period of time, diversification mix and income level. As you can see, the longer we live the more we must stay on top of the investments that will contribute to the lifestyle we want. Contact your financial advisor to see where you stand.