Peter Benedek retired in 2002. Well, he retired from his engineering career. He found a new one right away as a tireless retirement planning advocate and analyst, sharing his research on RetirementAction.com.
Peter spoke with us on how to plan for a more effective retirement.
What are some common misconceptions surrounding retirement planning?
"You can safely plan your retirement based on your life expectancy." As life expectancy is defined as the age by which 50% of your cohorts will die, or the 50th percentile, therefore the other 50% will live beyond life expectancy. In fact, joint life expectancy for a 65-year-old couple is age 89.5, and 75th and 90th percentiles are about ages 94 and 98!
"Time diversification works or that stocks are less risky over the long term." Unfortunately, at any point in time, and whatever the level of your stock holdings, you are exposed to market volatility and risk of crash, as it happened twice in a decade. In fact, the range of possible outcomes increases the longer you hold a risky asset!
"Active beats passive investment management." Evidence suggests that after costs of active management are factored in, only a minority of funds outperform their appropriate market benchmark. Furthermore, you can't predict a priori which fund or manager will outperform, and the longer the period over which you examine the data, the fewer funds or managers outperform.
"Stocks are too risky to be included in retirees' portfolios." Using exclusively fixed income securities or annuities in retiree portfolios exposes retirees to serious purchasing power reduction due to the corrosive effects of inflation.
"It's better to be over-insured." Insurance is expensive. Only buy insurance if you need it, and only as much as you need. Insurance is most appropriate in order to protect against risks, which are both low probability and high negative impact events - i.e., risks that you can't bear. The best examples are life and disability insurance for a young family breadwinner.
"You can time the market." It's highly unlikely that you can time buying, selling and re-entering the market; rebalancing is the best form of market timing, as it forces you to sell appreciated assets to purchase under-appreciated and cheaper ones.
Do we still need to plan to retire at 65, or is that benchmark going to shift?
With people living longer and healthier lives, it makes sense to aim to work longer to mitigate the higher cost of more years in retirement, to benefit from the opportunity for social interaction that employment provides and satisfy the need of many individuals to continue to contribute to society. However, all is not in our control: Some people are forced into retirement by an employer, by health issues, by need to care for family members and other unexpected circumstances. It is still good to financially plan for age 65 or earlier retirement so you have the financial independence at that point to choose. Planning to work to age 70-75 is a plan with a low probability of success.
When should we start saving for retirement?
The sooner, the better. The discipline of saving for retirement should start as soon as you start working. We should be aiming for 15-20% of gross income saved each year. Have a realistic financial plan and track progress toward it; make mid-course corrections as needed.
How do we balance retirement savings and concerns like student debt?
At least part of the savings targeted to fixed income allocation in our portfolio is game for mortgage or student loan repayment. Where else can we get an after-tax 3-4% risk-free return that we get when repaying such a loan? Of course, I assume as given that individuals do not carry credit balances on their credit cards, which carry even higher interest rates; all purchases should be paid off in full each month. Debt, even when incurred for good reasons, is bad if allowed to become too large and outstanding for too long.
When evaluating an investment for retirement, what qualities should it have? What are we looking for?
Using the principle that you "control what you can," there are very few things that investors can control: saving, spending, the cost of investments/advice and asset allocation. We are looking for broadly diversified portfolio composed of very low-cost passive investments, and an asset allocation consistent with our risk tolerance. The asset allocation should be maintained with periodic rebalancing, including during accumulation by making new contributions to under-weighted asset classes, and during decumulation by withdrawing from over-weighted asset classes. Whenever you hear about insurance or investment products which claim to protect your downside while they preserve your upside, you should be very cautious! If it sounds too good to be true, it usually is. Simplicity is the best; three to five broadly diversified plain-vanilla passive ETFs can typically implement your target asset allocation.
What trends should we be keeping an eye out for in retirement planning?
That inflation is corrosive, especially in retirement; you should investigate the opportunity that comes with availability of longevity insurance, especially now, permitted to be purchased inside 401(k) plans; and the emergence of robo-advisers: low-cost, human-assisted, computerized financial planning, asset allocation, rebalancing and tax-harvesting.