Are You Headed to a Secure Retirement?

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Asset Rich & Income Poor? 

Stockbrokers and most people who call themselves financial planners or financial advisors understand the wealth building process but have a difficult time converting those assets to the new reality of a retired person. Once retired, you can’t afford to lose capital, you need to keep pace with inflation, you must have a plan for the risks to your wealth (like health care and long term care costs) and you need the peace of mind that you won’t run out of money. Only then will you be able to relax and enjoy the retirement you have worked so hard to achieve.

I talk with people every day about retirement. For 25 years I have focused on helping folks create and implement strategies to retire with peace of mind and the security it takes to relax and enjoy that part of your life. Having the benefit of time, I have had the good fortune to see what works and what doesn’t. I want to share some of those insights.

Most folks, when I first see them, are relatively stressed out over their lack of progress toward retirement or over losses in their investments that have put them off track and feel they don’t have enough time to get back to where they need to be in order to achieve “retirement”. This is usually because their focus has been on Wealth Accumulation. While it is an important part of the process, I have met with too many folks who have accumulated a net worth in the millions, but are having a hard time affording even a modest lifestyle. That is because they are asset rich and income poor! You see, all of our working lives we have an income, slice off a piece to save and invest for the future, and use the rest to pay our bills and lifestyle expenses. Somewhere along the line, people lose track of how important this is.

I think it is due to all the emphasis on wealth building on the part of the popular press and the financial services industry. You may recall the Fidelity™ commercial that asked “what is your number?” and had a bunch of folks running around with numbers in the millions under their arm as if reaching that number would produce the magical secure retirement. While I can’t get into all the wall street rationalizations that support that thinking, like Monte Carlo simulations that purport to show you can draw 4% of a balanced portfolio each year, increase the withdrawal each year to keep up with inflation, and have an 89% “probability” of having your money last a lifetime. You can go to Investopedia and read this to find out what is wrong with that assumption. In fact, conventional financial planners have reduced the target draw down rate to 2-3% in order to be safe after the experiences with market volatility over the last decade or so. This is actually good for Wall Street because you will need to increase your number and will have to invest more.

You see, there are two main phases to your financial life: Accumulation and Distribution.Most everything you have learned about saving and investing focuses on the first one and ignores the second. I have always focused on creating accumulation strategies with an eye toward distribution. For example, a lot of folks who hit their “number” have most or all of their money in a qualified plan like an IRA or 401k. They think they have that million dollars but don’t realize they will pay taxes on that money in retirement so it is really only worth about $700,000. I am surprised at how many folks don’t know they will pay taxes when they take money out of one of those plans or start drawing a pension. Tax Deferred does not mean Tax Exempt!

In retirement, the most important financial issue is Income Streams. You must answer the question of “Do I have enough money to pay my bills”? For example, I see way too many who paid off their house (which is now worth a million dollars) but don’t have enough income to keep and maintain that house. These folks are forced to make very difficult, and usually costly, decisions about second mortgages and selling their home in order to pay their bills.

The other fear is outliving my wealth. Many folks will tell me their perfect financial plan would be to spend their last dollar on their last day. The problem is they don’t know when that day will be. Spend too little and you may have forgone experiences and enjoyment you could have had, spend too much and you could be living your last days destitute. That is why I try to teach clients that there are different tools for different jobs. The three considerations we all have are building wealth, spending wealth and transferring wealth after we die. Assets that may be great for wealth building can be terrible for leaving an estate or creating income. Other assets can be great for income but lousy for the other two. According to Jeffrey Brown, a professor at the University of Illinois, and co-author of the research paper; “Framing Lifetime Income,” we have built a retirement system in the U.S. that for too long has only focused on building wealth,” His research, and several other research papers in the last few years, have reinforced what I have known for a long time, guaranteed lifetime income such as that found with Social Security, Pensions or Annuities; greatly enhances your income during retirement, reduces the risk in your portfolio and generally improves peace of mind. You can read the paper at here .

So if you are or will be eligible for a pension or Social Security, know and understand your claiming options. I speak with an amazing number of people who leave tens of thousands of dollars in potential income on the table by taking the wrong option or not optimizing their payout. A little bit of planning in advance will help you get the most out of these programs. If you don’t have access to one or both of these programs, or if your income from them doesn’t cover your basic lifestyle income needs, talk to someone who understands annuities. I don’t mean someone who just sells them, but someone who actually understands them and can show you and fully explain the different approaches and options available.
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