Income Allocation
In February's edition of RAA Monthly, we introduced a new concept called Income Allocation (IA). IA challenges conventional wisdom and addresses the risks we face in retirement...Sequence of Returns, Longevity, Inflation and Market Risk (SLIM). Jason and I both have been developing retirement income plans for people for over 22 years now. Throughout the years, one of the cornerstones of successful retirement income plans has been having enough reliable income to cover essential expenses for life incorporating SLIM. Whether you read a book or an article, attend a workshop or a watch a tv show about retirement you will certainly see references to this simple rule of thumb...
To be successful in retirement, you need to have income to cover your essential expenses for the rest of your life.
That may sound simple but when so many variables are present and unpredictable, it can make things a lot more stressful and challenging.
In a perfect world, one would retire with no mortgage, maximum social security benefits and a pension.
The problem is that many retirees today still have a mortgage, may not have maximized their social security benefits, do not have a pension.
So, the onus is on the retiree (and their Financial Advisor) to find ways to make their savings last a lifetime.
I would like to share two true life examples of people close to me that you can hopefully relate to. I will use fictitious names but true details.
> First is Betty. Betty is a 73-year-old widow. Betty does not have much in her IRA. She purchased an annuity many years ago with the proceeds of an old 401(k). Betty's husband had a government pension that she is now receiving because of its survivorship provision. Betty is collecting maximum social security benefits because she delayed until she was 70 years old. Betty also has Long Term Care (LTC) insurance that she purchased many years ago.
Some would look at Betty's situation and focus on the fact that she only has ~$50,000 in her 401(k) and think things look pretty bad. Although she does have to be aware of the risks of longevity, inflation and running out of money, let's review all the positives. Because Betty has a pension, social security and an income from her annuity (all will last for as long as she lives), she is able to pay for all her expenses including her mortgage and traveling budget. Her pension and social security have a small cost of living adjustment (COLA) to allow her payments to keep up with inflation. She anticipates only needing to take her required minimum distribution from her IRA. If she needs ongoing medical care, she has LTC insurance to help pay for it.
The point of this story is to show how critically important income sources and insurance are in Betty's situation. Although she may not have a substantial net worth, she does have the comfort of knowing that she has a paycheck coming in to pay for her needs and insurance to mitigate the risk of excessive healthcare costs.
> Next is Freddy. Freddy is 43 and works for the local school district. He was just promoted. The promotion prompted Freddy to take a deeper look at his retirement plan.
As a school employee, Freddy has a pension and retirement savings account. Although he has been contributing to his retirement account, Freddy never really paid attention to the pension until now. Up until this point, Freddy had always felt as though he was behind in his retirement savings and wished he had saved more earlier in life. After taking a holistic review of his overall benefits at work, he was very pleased with what he found. If Freddy works until age 65 he will have 25 years of service. He found that he would then qualify for 50% of the average of his 2 highest consecutive years of salary. Freddy was not aware of this benefit. Realizing that he has a potential income source in retirement took a lot of stress away and made a big difference in the results of his retirement plan.
Again, the point here is to realize the benefit (both financially and emotionally) that a pension can have in retirement.
So, our message today as it relates to Income Allocation is simple.
Let us help you develop a strategy to reduce stress and make you more comfortable and confident that you will have enough income to cover your expenses in retirement.
If you would like to talk about anything we have discussed this month prior to your next meeting, please call or email us to set up an appointment.
