Your Kid's Education or Your Retirement

Guest commentary by Dr. Gregory B. Salsbury,
President of Western State Colorado University,
published by Financial Advisor Magazine at fa-mag.org (Jan. 28, 2016): 

Your Kid's Education or Your Retirement

Your Kid's Education or Your Retirement

In retirement, the average rate of return on your assets over time is not as important as when — and how big — the fluctuations are in those assets. If you have negative returns on your portfolio early into retirement it reduces the principal available to recover from such downturns when big positive years follow. This is commonly known as sequence of returns risk (SORR) and the potential impact on a portfolio is truly jaw-dropping. You have likely seen the illustrations comparing two separate portfolios that start with $250k or $500k while assuming identical rates of return and withdrawal amounts over a 30-year period. They show that one portfolio may be depleted within the first 15 or 20 years while the other ends up leaving a healthy estate to heirs which is larger than the original investment — a difference due solely to the SORR. Recently, aging boomers with college-aged children are seeing this risk increase due to an unexpected combination — slumping equity markets, a sour economy and soaring higher education costs.

One component of the SORR trifecta is equity market performance. At this writing some $7.8T has vaporized from the global value of stocks in the worst market start to a year on record. The DJIA lost more than 1,500 points in just 10 days. The market loss in the U.S. alone would equate to Google, Facebook, Intel, Netflix and Yahoo simply disappearing.

A second component is the economy. According to data released by the U.S. Census Bureau early last year, all but the wealthiest Americans are still struggling to overcome the prolonged economic slump as household incomes remain below pre-recession highs while the cost of living continues to climb. Per the 2014 data released by the Russell Sage Foundation, from 2007 to 2013, median household wealth fell by a whopping 43 percent, from $98,872 to $56,335. Unemployment has also forced many families to raid or deplete their savings. In addition, the cost of health care has continued to skyrocket, and according to the Common Wealth Fund, 82 percent of Americans devoted 20 percent or more of their incomes to insurance premiums in 2013, spending an average of $16,000 per year. That’s almost double what families paid for health insurance just a decade ago.

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