For most of us, we manage our investments with the goal of having a nice big nest egg when it's time to retire. But we need to continue to stay invested throughout our retirement. Often, investors are more afraid of running out of money than they are actually dying! Today Alex Cabot and Ed Lambert of Birch Run Financial discuss how to lower that risk.
Ed points out that psychologically, investors experience more anxiety around market changes right before and after retirement. After all, the move from drawing income from a salary to drawing from investments is one of the biggest changes of your financial life.
If you retire at 65, your median life expectancy in retirement is 20 years. And you have a 25% chance of living until age 90. How do you make your money last? You need a growth component to your portfolio. And while we plan for long-term market growth, we need to prepare for bumps in the road -things like the tech bubble bursting, the 2008 crisis, the "COVID Crash," and more.
Moreover, inflation is built into our economy by design. We've seen a 2.4% core inflation rate over the last 20 years. If you extrapolate that forward, $10,000/month in living expenses today will be $18,000 in 25 years, or $20,000 in 30 years! You want to have enough income to live on, and in most cases, have something to pass down to your heirs.
Alex speaks to the importance of diversification. With the help of Morningstar, he looked at several different theoretical $1,000,000 portfolios over the last 25 years. Assuming a 2.4% rate of inflation, and a $40,000 annual distribution (adjusted for inflation), here's what he found. That million dollar portfolio, counting inflation and distributions, would be worth the following today, 25 years later.
Alex breaks down these numbers, and explains why the diversified portfolio outperformed anything else on the list.
Here's the article on diversification Alex referenced on his LinkedIn in today's episode: https://www.linkedin.com/pulse/measuring-impact-portfolio-distributions-diversified-asset-cabot/