Retirement Planning

Retirement planning for retirement income

Sound retirement planning focuses on strategies for converting savings into lifetime guaranteed retirement income. In fact, having stable guaranteed income (think pension plans) creates the floor upon which a financially secure retirement is built. Unfortunately, many pre-retirees discover retirement planning for income much harder than saving for retirement. Why is this?

  • Retirement planning is a whole new world with new rules and complex financial decisions about how to replace income. Obviously you have never retired before so the emotional challenges and financial decisions are new and unique to you. 
  • Everyone started working with the same advice (save 15%, contribute to 401k, etc). However when work ends, everyone is in a different financial position (amount saved, marriage, dependents, home ownership, retirement needs…you get the idea).
  • The decisions in retirement are more challenging and the consequences can be frightening. Namely, no one wants to run out of money and become dependent on children, government or charity for support.
Longevity risks impacting retirement_1

Retirement planning is complex

If retirement planning scares you, you are note alone! Retirement planning is very complex and unlike the accumulation phase, there some choices during the decumulation phase where time is not on your side. 

Retirement planning that includes strategies for the following risks helps ensure you can retire with dignity and live a self-sufficient, meaningful retirement.

  • Insuring against longevity (i.e. outliving savings) 
  • Protecting against inflation( i.e. loss of purchasing power)
  • Handling unexpected (and uncovered) healthcare expenses for chronic illnesses
  • Protecting principle during market downturns
  • Minimizing the impact of taxes

Preparing to live off of your savings is very different than accumulating savings. It’s okay to ask for help and to learn more about options that will give you peace of mind. The first step in the journey is to work with a trusted retirement planner. A retirement planner can help you make sense of all the options available for generating retirement income to help you meet your retirement needs and lifestyle choices.

Retirement planning is based on three things

Building a nest egg over time (pension, social security, home equity, 401K, IRA, etc)

Protecting the nest egg against risk over the course of your retirement (longevity, sickness, market declines, inflation, taxes, etc)

Creating an income stream from your assets that will last your lifetime

Retirement planning starts ideally before you retire (in some cases with your first paycheck)

Retirement planning begins with your first paycheck. If you saved a percentage of that check in a company retirement plan then you made a retirement planning decision. You probably didn’t think too much about it at the time. When you chose to save, it was also a choice to one day turn that savings into retirement income you could live on. 

As you get closer to retirement, it’s time to start putting the plan together on how best to turn those retirement savings into income. Ideally, the best time to put it all together is before you retire. However, you still have choices and opportunities after your retire but procrastination can put your assets at greater risk. More importantly, it limits the options that might be available to you than at an earlier age.

Also, when you plan for retirement while you are working, it is easier to make changes and adjustments as you go. 

For example, you may discover you need to:

  • Work a few more years
  • Increase your savings contribution rate
  • Cut expenses 
  • Start paying off debt
  • Downsize

Retirement planning ensures you have an income not only while you work but also when you retire!

Retirement planning for retirement income will be different for different people

The main sources of retirement income for most people are:

Here’s the problem with all the choices and variables. We live in an uncertain world. For example, taxes play havoc with long term planning and Social Security has potential funding issues. Likewise, people are not always eager to sell their homes and downsize. To top it all off, we are living longer lives! It would be easy if we only had to plan a 10 year retirement! Now, we have to think about 30+ years!  A lot can change in 30 years!!

Many people decide to insure against outliving their savings by purchasing a retirement annuity that provides a worry free guaranteed income for life. 

Retirement planning addresses these risks to your retirement in a meaningful, well thought out manner.

One day you will retire. How will you replace your paycheck?

We have all spent a lifetime saving and dreaming of the future. To support those dreams, every two weeks you saved some of your paycheck and lived on the rest. Sometimes the every two week pay cycle became expected. Not that you were not grateful for a paycheck, you simply just received it and did your thing. Now that you are getting close to or have recently retired, you may be asking

  • How will my paycheck continue? 
  • Where will it come from?
  • What is the cycle?
  • Is it secure, reliable?, 
  • How much will it be?

Maybe you are in retirement now and are starting to think about this more seriously. That is okay. There is still time to make plans and adjustments!

Why do people not plan for retirement?

Retirement planning is actually pretty difficult. Mostly, there are a lot of moving parts and choices to be made. It all has to be balanced with

  • Managing protection and growth of assets
  • Meeting goals and desires
  • Handling unexpected emergencies
  • A large dose of reality (income needs vs income resources)

For example, we don’t want to imagine getting sick one day and needing long term care. It is much more enjoyable to envision the things we want to do  during retirement (i.e. being on sailboat in the Caribbean, sitting on the beach, spending time with grandchildren). Fortunately both events can be planned for with retirement planning. 

Switching from investing to insuring is a stumbling block for most people. We pat ourselves on the back for saving and being thrifty and watching our account balances grow. When the the time comes to spend our savings, we don’t give up our investing behaviors very easily. 

Consequently, proactively managing wealth may mean no longer keeping all your money in the stock market. This is probably one of the biggest mistakes made by retirees.

The biggest retirement planning challenge is modifying behavior

Changing our mindset and behaviors from accumulating wealth (in your working years) to distribution (in your retirement years) can be hard to do.

  1. We have been programmed to save and invest from our very first paychecks. The idea that one day we will stop saving and switch to withdrawing from our retirement savings is somewhat foreign. Let’s face it…we haven’t retired before!
  2. The consequences of not understanding an appropriate retirement plan, one which can protect your assets, can be devastating.
  3. Referring to the graphs below, phase 1-3 are important parts of your journey leading up to to retirement.  However, phase 4 is probably the most critical. 

Phase 1

Age 25-40

Young With Guts!

During our early working years, we assume more risk for the promise of a bigger return. Time is on our side and we have less to lose!

Phase 2

Age 40-55

Financially Maturing

In our mid career phase, we begin to modify our investment strategy to balance our risk/growth objectives primarily because we have more to lose!

Phase 3

Age 55-60

Financially Conservative

During our late career phase, we actively take measures to further reduce our investment risks knowing that if things go badly, there are less options for recovery…basically time and income.

Phase 4

Age 60 Plus

Protect and Insure

As we leave the workforce, we must INSURE OUR RETIREMENT INCOME! There will be no more paychecks to buffer losses

Insuring Retirement Income

We have been responsible for insuring our health, home and automobiles, life, etc. from catastrophes but no one really ever talked about insuring our retirement nest egg.

In fact in many cases, our retirement nest egg is worth more than our home, automobiles and other assets when all combined. So why would we not insure our retirement?

Insuring retirement can give you the same peace of mind as life insurance gives protecting your family or home/auto insurance gives protecting your house/automobile.

Would you drive your car without insurance?

Insuring a portion of your retirement assets against retirement risks is the only way of giving yourself peace of mind in your retirement years.

A secure retirement is nothing more than from a saving mindset to an insuring mindset!

These are the biggest retirement planning risks that can be insured against

  • Exposure to potential market risks
  • Increasing taxes
  • Longevity
  • Inflation
  • Death of a spouse
  • Healthcare costs