Plan to Ensure You Don’t Outlive Your Nest Egg

At age 65, the average life expectancy is 81.8 years for a man and 84.8 years for a woman.

Those were the figures as of March 2006 from the National Center for Health Statistics.

But with advances in medical science, it’s no longer a stretch to think that you could live to be 100. That’s great news – unless you run out of money.

Consider the following hypothetical example, which assumes:
•    You’re 64 years old and earn $60,000 per year.
•    You plan to retire at age 65.
•    You’ve accumulated $1,000,000, which you think will return 6% per year.
•    You’ll need $60,000 a year in retirement, excluding Social Security.

The good news is that if you have a 15-year retirement, from age 65 to 80, you’ll end up with almost $696,000 to pass on to your heirs.
The bad news is that if you have a 30-year retirement, from age 65 to 95, you’ll run out of money at age 88. (See footnote.)

But don’t worry.

With careful planning, you can recover, even after a downturn such as that of the past year.

You can save more, invest more aggressively or work longer. In fact, working longer might be the best option. According to Financial Engines, 50-to-60-year-olds can get their retirement savings on track after recent stock market losses without any additional savings if they work just two or three more years.

(Footnote) Assumes $1,000,000 in retirement savings has already been accumulated; another $60,000 is added. The money grows at a hypothetical 6% per year; $60,000 (in today’s dollars) is withdrawn each year. The example cited is hypothetical and for illustrative purposes only. It is not meant to represent performance of any particular product.

The Pros and Cons of Lifecycle Mutual Funds

Lifecycle mutual funds are designed to be easy, but if you don’t use them correctly they can throw your portfolio off balance.

Lifecycle funds offer a mix of assets designed to fit a particular investor’s time horizon. The asset allocation is changed over time as a certain goal, or “target date,” gets closer.

As a result, lifecycle funds can be good options for investors who want to take a hands-off approach to investing. But there are two potential pitfalls.

First, a one-size-fits-all approach seldom works in investing.

You may have the same expected retirement or withdrawal date as your neighbor, but you probably have different financial goals and different tolerances for risk.

The same fund, then, is probably not right for both of you.

Second, many investors don’t use lifecycle funds in the hands-off manner for which they were intended. Instead, they also own other mutual funds, stocks and bonds. This can open investors up to more risk. For example, if your desired asset allocation is 50% stocks and 50% cash, and your lifecycle fund achieves that, buying more bonds in addition to the fund will throw your portfolio off balance.

If you like the idea of a lifecycle fund’s simplicity but also want to invest elsewhere, you may want to put the bulk of your assets in a lifecycle fund and then allocate a smaller amount to other investments that aren’t likely to be represented in the lifecycle fund – such as sector-specific stocks.