Are You Guaranteed a Happy Retirement?

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As I look out the window of my office, it reminds me how lucky we are to live in such a beautiful place. Not only is it beautiful, but people who are lucky enough to call this area home, according to the state of California and the Journal of the American Medical Association, they also live longer.

Eliminating the Risks to Enjoying Life Pave the Way to Retirement Happiness

There are many reasons for that ranging from physical activity to diet and other factors, but whether you live here or not, if you live a life of healthy habits, odds are you will live a long time. This can be both a blessing and a curse. The blessings are obvious, the curse is that your money must support you longer.

Retirement Means Very Different Priorities for Your Money

If you think about it, for your entire working life, you save and invest to build wealth. Whether it is stocks, real estate, bonds, savings accounts or some other asset class, you own those to grow your wealth. You pay for your lifestyle out of your paycheck. This arrangement can last 30, 40, even 50 years or more of our working lives. This means you can be patient and wait out a market drop for your values to recover. After all, your bills are still being paid and you are not using your portfolio to pay them.

Once you retire, your assets now play a very different and much more important role. The assets are now used to pay your bills and provide your lifestyle. Unless you have a plan to deal with market volatility, the normal drops in values that all markets experience, can be very detrimental to your wealth.

When you’re retired, market corrections can become lifestyle disasters. The stress of that alone can make you unhappy. What can be done to make sure that doesn’t happen?

Longevity Means You Must Have a Plan

To guarantee a happy retirement, avoid things that can make you miserable. This is easy to say, but harder to do. Another way to describe those things that can make you miserable in retirement are the risks to your happiness. These are things like chronic illness, running out of money, getting scammed, losing loved ones, car accidents, taxes, and legal disputes are a few of those risks. I recently wrote about risk and how important identifying and then having a plan to deal with these issues is to your retirement happiness.

The number one risk to your retirement security is running out of money.

That is the risk that all other derive from. Think about it, if you die young, who cares what markets will do? What difference will interest rates, inflation or taxes have if you have passed?  There won’t be any need for assistance with activities or daily living or long term care.

How Can I Make My Income Last a Lifetime?

While wall street would have you stay fully invested in a mixture of stocks and bonds, since they assert that is the only way to make sure your money can keep up with inflation, every analysis I have seen indicates that method for approaching your retirement income needs has a significant probability of failing.

While it is possible to greatly reduce the chances of failure with this approach, one would have to be willing to take a pay cut in their retirement income when the value of the portfolio goes down to accomplish that. To me any plan that puts me at the mercy of markets, interest rates, political changes or other external influences, will not provide the peace of mind in retirement that it takes to be happy and fulfilled.

In fact, according to Tom Hegna, who wrote “Paychecks and Playchecks”, true retirement happiness is knowing that you can spend every dollar in your checking account and not worry, since your checking account will be re-filled next month, and every month after.

When doing retirement income planning here at Gainer Financial, we want our clients to understand their options and the reliability of their intended income strategies for retirement. If the scenario above isn’t acceptable due to the variability of your income, there are other assets that can produce specific incomes.

Here are a few examples and the level of reliability of the income they produce:

Bonds: All bonds are not created equal. The gold standard are U.S. government treasuries. You can get about 3.5% these days, but you must tie your money up for 30 years. If rates change (and they change every day) and you need to sell your bonds before they mature, you may get more, or less, than you invested. If interest rates go up from here, it will be less.

Corporate bonds are based on the ability of a company to pay the interest and their credit rating. If a company’s ratings decline, your bonds may also go down in value if you need to sell before maturity.

Muni bonds are issued by states and local governments and repayment is up to the tax receipts of the issuing agency.

General Obligation bonds are the safest, be very careful with bonds called Mello-Roos or revenue bonds as they are only secured by specific projects and are paid back from the income the project produces. If the project isn’t built, you won’t get paid. This happened to a lot of folks in the real estate bust.

Rental Real Estate: Your income comes from your tenant. Single tenants are potentially riskier than multi tenant for obvious reasons.

Dividend paying stocks: Today there are stocks paying 7 or 8% or more. Many of those used to be paying 4 or 5%, but the value of the stock went down, so the yield went up. It means that the owner of the stock lost money. And in many cases, there will ultimately be a reduction or elimination of the dividend for the same reasons the stock dropped in value. This happened with PG&E back during the Enron scandal.

Single Premium Immediate Annuities (SPIA): These provide guaranteed income for a period of years or a lifetime, designated at the time of purchase. Can provide level income or increasing income. They work like a pension. Once purchased, cannot be reversed (like a pension). There is an option for a Deferred Income Annuity, which creates income in the future. Often called income insurance, they can be used to create income after other assets have be consumed.

Deferred Annuity with Income Rider: These come in two forms. One is a fixed or fixed indexed annuity and the other is a variable annuity. The “income rider” provides a guaranteed percentage that you can withdraw from the account and the income is guaranteed to last a lifetime, even if the account value goes to zero. Some of these have provisions for increasing income, which can be beneficial as a hedge against increases in your cost of living over time.

The guaranteed withdrawal rate can range from 3% up to as high as 8 or 9 percent, which can provide very robust income streams. These can vary in terms and cost, so it is important to understand what these options provide and how much they cost so you can evaluate the value relative to the cost.

Mortgages: You can invest directly in portfolios of mortgages, individual mortgages or mortgage backed securities like “ginnie mae’s”. The advantage to these is they tend to have higher yields than bonds and are backed by real estate, so if something goes wrong and your tenants stop paying, you can take and sell the property securing the loans. These can have varying degrees of risk and you would generally want some protections like outside auditors to keep on top of what is happening with your investment.

Retirement Income Comes in Many Varieties

These are a few examples of assets that are designed to create income. The critical part of income planning is to make sure your basic needs will be affordable for a lifetime, regardless of markets, interest rates, or which political party controls government policies. Having dependable income allows you to relax and enjoy those things that make life worth living.

If you would like to learn more about some of these strategies and investments and how to select the strategies that will work for your peace of mind, contact us and we can schedule a consultation. Here’s to your Happy Retirement!
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