Retirement Income Planning

With 40 years in the financial world, I'm still learning all the time and have great resources.  One important lesson is that generating income in retirement is very different from growing assets.

The 65-year-old, whose parents lived to 75, misses the boat when he tells his wife they should spend all of their assets over the next ten years.  Of course, this strategy doesn’t work because he could live past age 75, she may well do so, and they may wish to leave a legacy for their family or charity.

One of the most striking things I’ve seen is that most people have no idea how much of their hard-earned dollars they can safely spend in retirement.  Deciding is complicated when both the length of retirement and asset returns are unknown.  In fact, studies show that without guaranteed income sources, many spend far less in retirement than they could comfortably withdraw from savings.

This number is around 4% pre-tax without any other strategy, and you can research it yourself.  Fortunately, we have some approaches to safely take more income.  With the right strategies, some people may live a better lifestyle with fewer assets and still leave a legacy.

I also speak for who you'll be in 10, 20, or even 30 years from now. There's a 50% chance one member of a healthy couple aged 65 will be around at 92, and a 25% chance one will be around at 97.  You won't see this anywhere else, but there's close to a 20% chance one will live to 100.

Too many name-brand financial institutions give hypothetical examples of how a 65-year-old can take over 6% from a portfolio without any other strategies.  Their footnotes often reflect an 85% or 90% likelihood that one’s money won’t run out by year 25 using this formula.  I believe we call this foolish, or maybe malpractice.

There are over 20 factors to consider regarding retirement income planning.  These include:

1. Early losses sink a portfolio irreparably, often called “sequence of returns” risk. The loss of a few tenants of one’s rental units causes the same pain.
2. A healthcare need, especially long-term care, can be financially and emotionally devastating.
3. Unexpectedly raising a grandchild may impact one’s health and finances.
4. Living a long time brings on a host of issues.  My Dad and Uncle lived into their mid-90s and my Mom's sister to 103years old, so I know.
5. People can make bad decisions as they age or experience elder abuse.
6. Taxes may rise, especially with substantial government deficits.

The above is not meant as individual financial, investment, or tax advice.  Of course, each individual’s situation is different.  Any decisions, implications, strategies, tactics, products, etc., are particular to one’s situation and may not be things we do.  But the cost of doing nothing is greater than the cost of doing something.

Individual investors historically realize returns well below those of professionals for a variety of reasons.  These include emotional decisions like fleeing the market when it dips, jumping in when it soars, and not being experts at making investment choices.

Institutions often have the luxury of holding money for decades, whereas individuals need to start spending money.  This allows for a longer view and more opportunities to rebound when values are down.

Having spendable money in another "pocket" in a market downturn may allow one's investments to rebound.