It ranks higher than ISIS and ebola. There are numerous studies that back this up; but, we don’t need studies to tell us this. In my own practice, I use a Retirement Planning Priority Review with all new potential clients. It’s the first feedback regarding their concerns; and, the fear of running out of money is checked virtually every single time.
People are concerned about their investment returns – they naturally would like to see them higher – but, they’re also concerned about risk, and who can blame them?
There was a time when pensions and Social Security provided the basic income people needed (both of which are basically annuities: people pay in over their lifetimes, then accept an income stream for life in lieu of a lump sum at retirement). Prior to those days, people simply worked until they passed away. Life spans were short back then; little need for retirement planning.
Today, with longer lives and companies dropping their pension plans, ‘longevity risk’ has been shifted from the employer to the individual; and, according to surveys, the same people who loved those other annuities actually have a negative attitude when it comes to buying annuities for themselves.
Not too surprising. They can be expensive. Many don’t address inflation risk; and those that do, do so with a higher price tag. And, let’s face it, irrevocable decisions aren’t popular with many people, myself included. The reality is that you’re handing your money to an insurance company and they do the investing, with all management fees, company profits, etc., coming out of your money. But, they do guarantee you an income for life, or two lives, or a fixed period… and some come with inflation protection. For some people, the guarantee of not running out of money is more important than anything else. Many, however, aren't comfortable with irrevocable decisions, myself included.
Investing your entire life savings into annuities, or anything else, may not be the smartest idea. There are many guaranteed income products available, but all come with a price and their own set of characteristics – some good, some not so good. It depends.
If diversification and discipline is the basic hallmark of successful investing; then maybe creating a sound blueprint - a good plan - is the foundation.
Adam Cufr, RICP, writing in this month’s issue of Retirement Advisor, advises people to get a handle on their ‘income gap’. It’s not hard to do: Ask yourself how much income you would need each month to maintain your current lifestyle if you retired today. Then, you simply subtract any income sources, like pensions and Social Security. The result is your gap.
[Note: Choosing the wrong Social Security strategy can also prove to be an expensive mistake. See my Social Security Learning Center - just scroll down when you reach the home page.].
To fill that gap, you can use annuities, as mentioned above where insurance companies bear the performance risk, some other guaranteed option, or you might opt for a risk-based investment portfolio designed either to generate consistent and reliable income or total return, to which you apply a sustainable withdrawal rate (SWR)… or some combination of both.
What’s right for you depends on (a) what’s workable, given your situation, and (b) your own attitudes – you have to feel good about it. It helps if your choice is efficient, as well, from both a cost and tax standpoint.
The financial planning methodology for achieving ‘your number’ can be characterized by three distinct approaches:
- Systematic withdrawals – Identifying a sustainable withdrawal rate (SWR) that will allow you to address income and inflation concerns while investing for total return (a combination of growth plus dividends).
- Flooring – Allocating assets to provide a secure income designed to cover essential (vs. discretionary) expenses; allowing you to allocate any remaining assets into a more aggressive growth portfolio (since essentials are covered) for long-term objectives.
- Bucketing – Allocating enough money to liquid, safe investments to cover, for example, the first five years of expenses, then investing the balance to cover needs beyond that period. As each year goes by, money is shifted from the long-term bucket to the short term bucket so that five years’ expenses are always covered and provided for.
These strategies can be used in combination, as well; but remember: Each has its own set of advantages and disadvantages.
There’s no strategy or investment that doesn’t have it’s own set of downsides – that’s life.
Nothing’s ever perfect.
The issue: When you look at any product, investment, or strategy and analyze all the benefits and negatives, the question shouldn’t be “What’s best?” It should really be, “What makes the most sense for my personal situation?” Which one, or combination, will address all your needs and concerns most efficiently while still preserving your options down the road.
The only constant in life is change. And, stuff happens.
How much risk is in YOUR current portfolio? Do you knowYOUR “risk number”?
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.