It’s 1950 and you are at the “retirement age” of 65.  It’s expected that you will retire, and there’s more than a gentle hand on your back as you clear out your desk. 

Social Security has been in place since 1935 thanks to FDR and the New Dealers, and retirement age was set at 65. Your co-workers are celebrating with you and for good reason--actually reaching retirement age is quite an accomplishment. When FDR and the New Dealers settled on 65 as the golden number in 1935, the average life expectancy in America was 63. Many people didn’t live long enough to collect Social Security benefits, and FDR eventually proposed to have the retirement age for Social Security changed to 62. 

In addition to Social Security, you have a pension, and when combined, the two income sources will allow for a relatively modest though somewhat meager lifestyle. If you are like most retirees, you can expect to draw between 20 and 24 monthly pension checks.

Now, in year 2014, what has changed? For starters, the age of 65 bears little resemblance to the 65 of 1950 or even 1970. While Social Security benefits are available as early as 62 and the full retirement age under Social Security is currently 66, most people today are not old at 66. 

Furthermore, pensions that stretch out for the lifetime of the retiree aren’t as prevalent as in the 1950s. Rather than expecting to live long enough post-retirement to collect one or two years of pension benefits, the average life expectancy for a United States resident who is 66 years old, as calculated by various health organizations, is projected to be almost 17 years for males and 19 years for females. Almost a quarter of our lives will be spent beyond the retirement age of 66. For most of us, we won’t have a pension assuring funds for our lifetimes. The big question, then, becomes: How can I be sure I won’t outlive my savings?

As we live longer, we have to protect ourselves from the effects of inflation: a 3 percent inflation rate will double our cost of living over a 24-year period. That fact, along with increasing longevity, makes it more important than ever to maintain a diversified portfolio that exposes an investor to different asset classes for various situations and purposes. In addition to diversification, investors need their portfolio to include a growing income stream.

In today’s environment, we still have stark memories of the financial crisis of 2008. Many of us, consequently, remain hesitant to invest in the stock market, especially now that we are reminded daily by the talking heads on television of “all-time highs” in the market. 

Yet, if we go back to the discussion of outliving our money, would I rather be invested in a basket of stocks that have a history of raising their dividends and a 3 percent yield, or in the U.S. 10-year Treasury, with a yield of 2.6 percent—a level income of 2.6 percent for 10 years?  

The basket of stocks not only can provide an increasing income payout, but it also has the potential to increase in value over the same 10-year period. Meanwhile, the 10-year Treasury payout remains consistent, year in and year out, losing ground to inflation over that period.   

Now don’t get us wrong. Investors shouldn’t be 100 percent invested in stocks, but they shouldn’t forsake them just because we are at “all-time highs” in the market. A well-diversified portfolio would include fixed income, but it would also include stocks—both domestic and international—real estate investment trusts, and other asset classes that cannot only grow, but grow an income stream.

Annuities can have a place in a diversified portfolio, but be cautious of their overuse. Annuities, while offering living benefits and certain guarantees, ultimately become a frozen income stream—they aren’t the panacea of investing that some people might lead you to believe. The portfolio, as well, ought to be dynamic, proactively addressing changes in the market and the economy. Allocating all of your funds to annuities or U.S. Treasury bonds prevents that necessary flexibility.

As life spans increase, our single biggest risk could very well be outliving our money. We need to determine our lifestyle needs, weigh our risk tolerance, and examine our longevity prospects, realizing there is no single investment strategy that fits all situations.

Any investment plan must be tailored to the individual investor, and it should be diversified and dynamic and include a growing income stream. This strategy will allow us to get invested, stay invested, and maintain a focus beyond the head lines of the day.

Hedley Greene is a senior vice president and the director of wealth planning, and Bruce Pedey is a senior vice president and financial adviser, both with D.A. Davidson & Co. in downtown Spokane. Contact Hedley at (509) 456-6693 or [email protected], or Bruce at (509) 456-8323 or [email protected].