The question isn’t at what age I want to retire; it’s at what income.”
- George Forman
Retirement Income is really the key to all retirement financial planning. If you can get this piece right, a host of other issues fall into place.
What is Retirement Income ?
Retirement Income refers to the sum total of all income you receive while in retirement including:
- Continuing salaries
- Social Security
- Investment income from interest and dividend payments
- Other investment distributions
- Annuity payments
- Insurance withdrawals
- IRA withdrawals
- 401k withdrawals
- and more.
Organizing all of this in order to produce dependable and safe retirement income is actually quite complicated. There are many challenges and risks, both financial and psychological, which need to be managed along the way.
Challenge #1 - Investing is different in retirement.
The investment world has long preached the importance of regular savings, dollar cost averaging, diversified portfolios, asset allocation and holding for the long term. This works well when individuals are in their working years and are actively putting away savings. In retirement, when we are withdrawing our savings, however, some of these rules are turned on the head and can actually make matters worse.
Take the example of “Dollar Cost Averaging". This is when an investor routinely invests new amounts of money over time regardless of whether the market is up or down. Since no one knows when the markets will be higher or lower dollar cost averaging lets investors purchase an investment at an average price determined over a long period of time. This will often lower investment risk by reducing the impact of price fluctuations. This removes the need to be concerned about timing an investment and could improve performance relative to investing a larger sum of money all at one time. With Dollar Cost Averaging it does not really matter when the markets are up or down because all of the investments are averaged over a long period of time.
Be aware that such an plan does not assure a profit or protect against a loss. Investors should consider their financial ability to continue purchases through periods of low price levels.
Dollar Cost Averaging is fine in the saving mode. In the "withdrawal mode", however, the effect of taking regular, periodic withdrawals could vary dramatically depending on exactly when the markets are up or down. Down markets early in the withdrawal period could devastate a savings portfolio leading to a very different long-term outcome, especially during longer retirements.
Challenge #2 - Retirement Financial Risks
Retirement Financial Risks are unique concerns that must be considered when you are planning your total retirement income strategy.
Challenge #3 - Spending and Expenses
You need realistic projections of lifetime expenses. These need to include many factors such as choosing a realistic period of time, assumptions for annual inflation rates, estimates of lifetime health care costs and overall spending. Furthermore, resources are often limited and many individuals need to review their high-level life priorities and may have to make adjustments to their spending assumptions.
Challenge #4 - The End of Paychecks
It is also hard to overstate the psychological effect of the end of paychecks. There is no longer income from a job automatically arriving in your bank account. It’s up to you to generate the income.
For entrepreneurs and salespeople this may feel familiar. For many of us, however, this is unfamiliar and intimidating territory. You may need to spend down your nest egg to pay for life expenses. Even though this may be the reason for which you saved, it can still be unnerving to see your savings decrease.
This can lead to a number of common mis-perceptions and possibly poor financial choices. Some individuals may simply try to block out this entire discussion, stick their heads in the sand and not even think about these important financial topics. Others may tend to be overly conservative and frugal, when, in fact, they have adequate resources to live much better.
We partner with you so you don’t have to go it alone. We will help you navigate these challenges, make informed decisions and ensure that your finances are focused on what matters most, your important goals and dreams.