Step Two: Understand how purchasing power changes
New retirees are probably accustomed to fretting over daily market movements — a holdover from their earlier years when they invested with strong returns as the primary goal. What they need to comprehend in retirement, however, is how inflation can eat away at the value of the income they receive. According to Thornburg, a retiree who has $1 million socked away and plans to spend a level $33,333 per year over a 30-year time horizon will end up with vastly diminished purchasing power when accounting for inflation. An average inflation rate of 3% per year will cut that $33,333 to $19,010 in annual income over a period of 20 years.
Boomers should think about the level of returns they need in order to back their withdrawal levels over time — the so-called “real return hurdle,” according to Thornburg. Advisers should also keep clients aware of the expenses tied to the investments themselves, the cost of taxes and the ill effect of inflation.
There are three figures they need to weigh when coming up with the return goal: the length of time in retirement, the spending rate and how much the client wishes to leave to heirs.