Retirement Income Planning: Are you doing it all wrong?
“The COVID-19 pandemic, if it taught us nothing else, demonstrated the need for guaranteed and predictable sources of income.”- Teresa Kuhn.
We live in an age of volatility and uncertainty. Even well-planned individuals find their wealth exposed to destructive forces such as inflation, declining interest rates, or natural disasters. That’s why old-fashioned, “one-size-fits-all” money advice and retirement planning are so ineffective for most people. Given the current economic climate, individual risk tolerances, and money mindsets, it’s impossible to pick a template, customize it, and then forget about it.
However, there are some best practices and principles that you can and should incorporate into the framework of a well-designed income and retirement plan.
Design your plan “backward.”
A lot of people lock themselves into the habit of chasing after returns. This devotion to getting more interest is why I often encounter pre-retirees with eye-popping (and, in my opinion, dangerous) amounts of money in risky investments. I think this willingness to jump into unsafe situations is because people are taught that it’s a requirement to take on risks if you want the highest returns possible.
Chasing returns means potentially exposing your cash to a lot of unfavorable situations.
My methodology for building balanced, sane retirement plans is simple. You should, as the bestselling author and business mentor Stephen Covey says, “Begin with the end in mind.” Instead of starting your financial journey by chasing after returns, then waiting until you get older to think about creating income streams, you should put your safety net in place FIRST.
As a financial designer, I encourage my clients to use time-tested vehicles such as modified whole life insurance and annuities (when appropriate) to build the CORE of their plans. Annuities offer you the opportunity to create guaranteed streams of income that you won’t outlive. Modified and specially designed whole life insurance can provide you with steady growth, flexibility, liquidity, and control. Together, these proven products will give you a solid foundation upon which to build your A-Z blueprint.
Best of all, when you have income streams in place, you can relax a little and invest in assets that provide growth, such as income-producing properties or other investment opportunities. The critical idea is that you will know that you have some predictable income if things go sideways.
Think of Social Security as the “icing” and not the CAKE
Many people have the idea that Social Security benefits will sustain them when they no longer work. This belief may be a huge mistake. While I am not pushing the idea that Social Security will suddenly evaporate, I do think putting all one’s eggs in this particular basket is probably not a good idea. Demographic shifts, along with wasteful spending by the government, have made Social Security a lot less secure.
As of 2020, the average Social Security check was around $1,503 per month. Payouts vary, of course, according to lifetime earnings and age. Still, in most places, Social Security checks will barely cover necessities, much less additional medical expenses or emergencies. If you want a safer, secure, and stress-free retirement, you MUST augment Social Security with other reliable income sources.
Don’t put all your money into qualified plans. If you put money into an employer-sponsored program, such as a 401k or IRA, you are way ahead of most Americans. 70% of people over 50 in the US have NO money saved for retirement! However, it would be best if you created your additional streams of income outside your qualified plans.
Government program rules can and do change, and often these changes do not work in your favor. So, while it’s great to take advantage of the tax-advantaged growth offered by qualified plans and any “free” money your employer contributes, don’t forget to keep building and refining your safe money core.
Never sit back and let the “pros” handle everything. Most financial advisors and agents are well-educated, experienced, and looking to give their clients an edge in our unpredictable world. That’s a great thing. But it doesn’t mean that you should be uninvolved in the process once the initial blueprint is in place. Working with a professional advisor is a partnership in which you always remain personally involved. It’s ok to leave some of the more routine tasks to your advisor, but you should never leave the entire course of your finances in the hands of one advisor or institution.
It’s your money, and you have the right to ask questions, make suggestions, and ask for clarification when decisions are made on your behalf.
Don’t think you have forever. People often want to know at what age they should begin thinking about retirement. My response to that question is, “As soon as you start working.” You see, it’s common to believe that by earmarking some money for savings and safe money when you are younger, you are failing to get the most for your money.
The reality, though, is that if you don’t start saving while you are still in your prime earning years, you may be in danger of outliving your retirement. It takes time to grow wealth. When you are younger and still working, time is your friend. Compound interest can increase your wealth dramatically. Begin the process NOW, and be consistent if you want to achieve the best results.
Even though times are challenging, it is still possible to enter the post-work phase of your life with fewer worries and the ability to maintain your lifestyle. Partner with your trusted advisor to incorporate essential building blocks into your income and retirement plan. Choose your financial guide carefully, however, and be sure they have your best interests at heart. Make sure you add safe money products like annuities and life insurance to your portfolio to form a solid cornerstone and gain growth potential, safety, and liquidity. Most of all, don’t get discouraged as you move forward into your financial future. You can still avoid making serious money mistakes and have a more prosperous and enjoyable retirement.