Retirement is hopefully a long-term problem, and as such requires a long-term strategy as a solution. According to tables in the IRS Publication 590, the average couple that reaches age 62 in 2013 will have at least a 50% chance of one or both of them surviving to age 92. Over the past generation this statistic has been consistently rising. We think this means that we need to look at a time-frame of at least thirty years, if not more, in successful planning. So how do you generate thirty years or more of an income that rises to keep up with inflation, without running out of money along the way?
At the heart of the puzzle around this decision lies the challenge of price inflation. When prices for all of the goods and services you will consume during your retirement rise each year, the value or purchasing power of your investment holdings, as well as the income they generate, are diminished by an equivalent amount. In effect, this means that you start out with a negative rate of return – one that your investment earnings have to overcome before you have any true earnings.
We can think of it like a current working against a boat trying to head up river. If the current is flowing against you at three miles per hour, then for starters you need to be moving forward at three miles per hour just to stay where you are. If not, then you are most assuredly going backwards.