Dealing with Retirement Planning Uncertainty

With all the uncertainty in the finances, stock markets and economies, retirement planning is getting much more difficult. Here are just a few of the elements making retirement planning more challenging:

Poor stock market performance. Historically, the stock market returns have been 8 to 12% over the long periods. However, the returns for the past decade are now negative. The major indices are down over 50% since the most recent peak in October, 2007, resulting in index funds also falling over 50%. Surprisingly, some blue chip stocks, e.g. financial companies, have fallen up to 98% in the past couple years.

Financial advisors used to conservatively assign 6-7% long term returns for a diversified stock portfolio to growth of a retirement portfolio. However, in today's market, 6-7% seems overly optimistic. Unfortunately, using negative returns of the past decade doesn't offer much hope for growth either.

Declining dividend and interest returns. Retirees that depend on dividend and interest income have received rude awakenings this past year. Previously consistent and rising dividends payments are being cut or eliminated. For example, Dow Chemical, Pfizer, General Electric and many financial stocks have significantly cut their dividend in the past year. Dividend cuts of 50 to 90% are reducing expected income by the same amount.

In addition, interest rates have dropped significantly over the past six months as investors look for safe havens, e.g. U.S. Treasuries, where they can invest.

Home prices declining. Values are no longer growing at 3-5% per year. Often a major part of a person's net worth, homes prices are now falling since the bursting of the housing bubble in 2007. In addition, one in nine mortgage holders are falling behind in payments.

How can one plan for retirement using these types of investment returns? The answer is one can't. These type of returns would lead me to conclude my only options are to work forever or to depend primarily on Social Security :-)

For me, the solution is to assume that long term returns will be close to the average and adjust for short term (up or down) variances. To me, an assumption of 7% long term returns from stocks is a reasonable estimate. Although it appears unlikely now, I believe the market will be at or above 7% returns within a year.

If the market continues to fall, our adjustment will be to continue reducing expenses and increase wage income through part time jobs or a full time job. If we were still working, we'd reduce spending and increase the amount of funds saved.

If the stock market has returns over 7%, we will adjust by increasing our cash position, and perhaps paying down our mortgage, which is our only debt. We would do this to be better prepared for the next market decline, since I expect the year to year volatility to be much higher over the next few years.

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This is not financial or retirement advice. Please consult a professional advisor.

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