Money & Finance

Staying Alive, Staying Alive

“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.” – Jonathan Clements How does the average retiree manage to provide an income stream without completely depleting his or her assets? The five risks associated with retirement income investing – longevity, inflation, spending behavior, market risks and unknowns – are much more complicated than the risks one faces during the accumulation phase of their lives

Planning and Execution Key to Successful Retirement

by Ryan Lees

“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.” – Jonathan Clements

How does the average retiree manage to provide an income stream without completely depleting his or her assets?  The five risks associated with retirement income investing – longevity, inflation, spending behavior, market risks and unknowns – are much more complicated than the risks one faces during the accumulation phase of their lives.  Investors, during the accumulation period, have more time to recover from market lows, while they can offset losses with additional years of growth and contributions.

In our retirement years, the sequence of returns is more importantly critical to our ultimate success, not just the average return over a given period of time.  The unique complexities in retirement planning require a thoughtful prioritization of solutions and planning.  As retirees transition into the retirement income phase, what is important is how much income they can generate, and subsequently how they can continue growing their assets.

Filling the Gap

Most retirees are going to have some significant sources of reliable income to meet their cash flow needs.  Social Security, pension income, continued employment and income from assets are the four important sources of retirement income.  However, most are going to recognize a gap (the difference between projected expenses and reliable income sources).  So how do we plan for the difference?  How do we fill the gap?

  • Fixed Income Securities – A portfolio of government and sovereign bonds, municipal bonds, agency bonds, corporate bonds, preferred stocks and asset backed securities (e.g. credit card, car loans or mortgages securitized by banks).  With bond portfolios the current interest rate environment requires careful, ongoing active monitoring.
  • Annuities – With annuities, we segment further into Lifetime Income Annuities and Variable Annuities with a Lifetime Income Benefit.  Both can provide for a guaranteed income stream through retirement.

Consideration must be made as to the sacrifice of control over the assets in return for the guaranteed benefit.

Planning

Although investors cannot diversify against all investment risks, we must decide in our Goal Planning and Monitoring (GPM) what risks are most important to address and what risks to partially address in construction of their portfolio.  The retiree might choose to fully address longevity risk by partially utilizing annuity, fixed income and equity income classes.  He or she might choose to address market risk by reducing holdings in equities.  By identifying your priority of risks, you can work with your financial planner to best allocate income classes to address specific needs.

What Now?

After addressing the income gap and identifying what risks we can live with, within reason, the next phase of planning and monitoring involves “staying alive.”  Though I am a huge fan, I am not referring to John Travolta and his captivating moves in “Saturday Night Fever.”

Retirees have to balance the tradeoff of risk adversity with income as well as growth.  With retirees living well into their nineties, we must take inflationary risk into account.  Not to mention, the retiree might decide that their income over time does not meet their spending needs, thus requiring them to dip into their assets.

Balance

Clearly we assume a more volatile type of risk with equity market exposure.  How can we provide for growth without the constant worry associated with a troubled global economy?

Low exposure in equities along with proper diversification can reduce much of the risk that keeps retirees up at night.  As we enter into the income phase, equity positions within our portfolio will begin to take the backseat while other fixed-income classes take the lead.  Remember, no matter how diversified we are, risk can never be eliminated completely.  The key is finding a happy medium between risk and return.  This helps us ensure our success in meeting our financial goals while still getting a good night’s rest.

Keeping your Eye on the Ball

With a consistent cash flow or “paycheck” generated from their investments, retirees should be more likely to stay on track and accept the volatility that we can all agree as inevitable.

While creating a good plan is crucial, many retirees lose track of their goals or fall victim to one of the pitfalls in retirement planning:

  • Monitoring your withdrawal rate
  • Keeping an eye on expenses
  • Watching out for large withdrawals
  • Repositioning of assets
  • Managing tax efficiency

Periodic review meetings with your financial planner and tax advisor can have a profound impact on the success or failure of a well thought out plan.  Creating the plan is not the end; it’s the execution of the plan that determines success.

Ryan_LEES

 

Ryan Lees is a Financial Advisor, RJFS, with Whittaker Cooper Financial Group in Melbourne, FL.

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