Now that 2012 has arrived, it’s time to review our retirement planning and financial performance for 2011. Annual performance metrics can be painful to examine when you are in your 60’s because the windows of opportunity are shrinking. If the numbers are bad, the recovery options may be limited to either working longer or accepting a diminished retirement income. So lets look at the data and see where we stand.
The value of our retirement “nest egg”, i.e., those assets that are dedicated retirement investments, increased in value by 6.4%. This is based on a combination of investment returns and additional contributions. For 2011, our best performing core investment was VIPSX at +8.8%. We sold VEU and VTI because they hit their stop limit prices during a market decline. Both were down for 2011 so I have no regrets about dumping them. We partially replaced VEU and VTI with LTPZ which was up over 20% in 2011 although much of that gain occurred before we bought it. I still like how LTPZ is non-correlated to most other market indices. (FYI – LTPZ is an exchange traded fund offered by PIMCO that captures the returns of longer maturity Treasury Inflation-Protected Securities (TIPS).)
A “what does it all mean” performance metric that I also like to track annually is the value of our retirement nest egg if it were to be 100% annuitized. To do this, I visit the Immediate Annuities website, enter our ages, then plug in the total current value of our retirement investments. The site will then generate the estimated monthly income we would expect to receive if we purchased an immediate annuity for that amount at that moment. I use the income number for a joint life annuity.
At December 31, 2011, the estimated annuity income from our nest egg increased 5.4% from 2010. This reflects a number of different variables, primarily the size of our nest egg (increase), our ages (increase), and the nominal returns offered by the insurance companies that sell immediate lifetime annuities (decrease). All of these factors are relevant to retirement planning. It is unfortunate that while our nest egg increased in value by 6.4%, and we aged a year, the larger nest egg would have purchased a lifetime income that was only 5.4% higher than 2010. Obviously the insurance companies are experiencing a more challenging investment environment (and may also be charging higher fees compared to 2010.)
Overall I am pleased with our progress for 2011 but there is more work to be done.
So have you done your own a financial check-up for 2011?