You may have heard something about a retirement crisis. Now, your reaction may have been to look at your 401(k) balance and think, “Yup, that’s me” or “No crisis here.” But wherever you fall on the spectrum between fatalistic acceptance and cheerful confidence, there are plenty of reasons to rethink your retirement investing. Here are five of them:
1. You’re going to live longer
If you are 60 years old, the average retirement life expectancy the day you started work was about ten years. Today, you can expect a retirement that’s two to three times longer. It would be difficult to overstate the consequences of longevity. Managing it will require more savings, perhaps more growth in your portfolio and certainly a lot more careful planning to make your money last.
2. Bonds won’t carry the weight
Thirty years ago, you could have invested your retirement portfolio in bonds and enjoyed income, relative “safety” and growth as interest rates steadily declined. That’s not likely to be the case the next thirty years. Not only have yields been at sustained lows, if rates do begin to rise, the value of bond portfolios is likely to take a hit. The expected returns of bonds may force you to rethink your portfolio and consider fixed income exposure from more regions and credit qualities.
3. Risk ignores borders
Markets are more interconnected than ever before. Risks from economic factors, interest rates, regulations, political upheaval and currency exposure can affect returns across sectors and asset classes. Simply diversifying between U.S. large cap stocks and bonds may not be enough. You may need to consider dedicating portions of your portfolio to potentially unfamiliar regions, sectors and other financial instruments.
4. You have more choices to make
We tend to think of retirement as an investment problem. But three of the most important choices you will make have nothing to do with investments. They are how much to save, how much is enough, and when to retire. Clearly these are interrelated. If you are concerned about your progress toward your goal, increasing the amount you set aside or adjusting your retirement date, or even scaling back your retirement spending goals, can make a huge impact.
5. You need to build your own pension
We seldom put it in these terms, but the goal of your retirement savings is to build your own pension. At some point in the future, your current stream of periodic income (i.e., your paychecks) will cease and you will need to replace it from whatever means available. This shifts the question from “how much have I saved,” to “how much income can I expect?”
Add these five reasons together and you get a picture of retirement that is more complicated than many people imagine, which is why it is critical to be guided by clear goals. BlackRock’s CoRITM Retirement Indexes can help people 55 and older estimate their retirement income potential, giving you a new way to measure how prepared you are to retire. Then you can work with your advisor to create a specific plan, balancing growth, risk and income generation, to help get you there.
Chip Castille, Managing Director, is head of the BlackRock Global Retirement Strategy Group.