Retirement Income Planning – How to Make Your Assets Last a Lifetime
The most pressing concern in Retirement Income Planning today is: “Will my assets last the rest of my lifetime?” The fear of dying, which was once the greatest fear of retirees, has been replaced by the fear of dying broke. The prospect of outliving your money and existing your last years in a less than adequate or dignified manner is terrifying for all but those affluent enough for it not to be a concern.
For those retirees who were always in the lower earning strata during their working lives this isn’t as big an issue as it is for those that were middle to upper income earners. The lower wage earners have been used to living a very modest lifestyle and Social Security will replace a much greater percentage of their working income.
Baby Boomers who were in the middle to upper middle class of earners during their careers have much tougher decisions to make about how to stretch their Retirement Plans, investments, and savings through their remaining lifetimes. There are certain expectations this group has of retirement, e.g. – maintain their current level of spending, travel and leisure activities, gifts to children/grandchildren, etc. All this while life expectancies are steadily increasing. Couples who retire between ages 60 – 65 have a greater than 40% chance of one of them living to age 95 or longer. Social Security usually may replace less than 25% of their pre-retirement earnings.
The choices made about what to do with 401(k)’s, IRA’s, investments, and savings will be the difference between living well not just in the early active years of Retirement, but in the years of declining health when it’s most important.
First, one has to be realistic about what they expect from their various Retirement Income sources. If you have $500k in a combination of Retirement Accounts, investments, etc., and want to draw a $40,000 annual lifetime income from that – plan on running out of money by around age 80. Several of my clients listen to Dave Ramsey who has said on his radio show and on his website that one should expect a 12% average lifetime return on their mutual funds and be just fine taking out at a rate of 8% forever. This is poison for people who really expect this to happen. See this recent article: http://time.com/money/2794698/save-like-dave-ramsey-just-dont-invest-like-him/ . Especially so when the actual 15 year average return on the S&P 500 Index is 2.56% and the 15 year average return on the Total US Stock Market is 4.74%. See here for those numbers: http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5EGSPC;range=my
There are three common schools of thought about how to position assets to last a lifetime:
- Systematic Withdrawals using a Safe Withdrawal Rate (currently between 2.8% – 4%)
- Segmenting your portfolio for different stages of Retirement – Matching assets to time periods.
- Flooring your income with a portion of assets in Annuities or Treasury bonds, and investing the rest for growth. Guaranteeing the lifetime coverage of basic living expenses and taking discretionary spending from the investment portfolios.
What’s best for each Retiree’s situation depends on a lot of variables and their expectations and assumptions about things like risk, longevity, and health. Many times these strategies can all be used at the same time for a client – segment some assets for certain spending goals, set up a pension-like income base that lasts for one or both lifetimes, and then having your various investments to use when needed.
Retirement Income Planning is becoming the most requested specialty of advisors in the financial planning business. http://www.forbes.com/sites/laurashin/2013/11/12/do-you-need-one-of-these-retirement-gurus/. Thirty years ago people wanted to know the “hot stock tips”, 20 years ago they wanted to avoid Estate Taxes, now Baby Boomers just want to know how to live a potential 35+ years and maintain a lifestyle without going broke or depending on their kids.
When you are interviewing or considering which advisor to use – look for the RICP® Designation. Retirement Income Certified Professionals, myself included, have met stringent requirements and coursework dealing with all aspects of Retirement Income Planning, Social Security strategies, Income Distribution planning, Taxation, Long Term Care, Medicare, elder living arrangements, and Retirement Portfolio sustainability.
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