The New Retirement Landscape

The “boom” in baby boomer retirement is on the rise. This mass stampede towards retirement runs alongside a notoriously unstable time in America. The world we live in has become complicated and challenging to navigate.

The retirement environment today includes low interest rates, volatile stock markets around the world, unprecedented longevity, increasing budget deficits and financial ambiguity. These realities are creating unnecessary stress and anxiety in many lives.

Planning for retirement is not going to be as easy as it was for your parents. I’m not sure if companies give out gold watches anymore. I do know that guaranteed pensions are far and few between. Today, much more preparation will be necessary for a successful outcome.

On a personal note, I have heard some deeply troubling stories about retirement plans gone wrong, as I’m sure you have. None of us want to end up being a financial burden on our families during our retirement years. Running out of money is a very real possibility for those who don’t take the time to prepare for retirement.

Personal Responsibility and Your Retirement Portfolio

Personal Responsibility Defined: The willingness to accept the importance of societal standards for individual behavior, and to make strenuous personal efforts to live by those standards. No one but you is to blame for your retirement planning, or lack thereof, so make it count!

Baby boomers are facing a crisis—the first generation to ever live through times like these. Whereas once you could trust Social Security and your company retirement plan to secure a long and happy retirement, this is no longer the case. We have entered into an era of personal responsibility.

Employer retirement benefits have become much less significant over the past few decades. Only 20% of workers from the private sector will have access to a pension that pays out for life. When 401(k)s came on scene, they were was supposed to supplement the company pension. Now, for many, the 401(k) is the pension plan and you are responsible for funding it, choosing the best investments, and making sure that the money lasts appropriately. As a result, many boomers are realizing that they are not prepared.

It’s also been said that the Social Security system is fundamentally flawed. In fact, the Social Security (OASDI) Trustees Report states that “significant uncertainty” surrounds the “best estimates” of future circumstances. It’s up to you to make your economic security in retirement a personal mission. We have an industry bursting with rock-stars who place the financial futures of their clients in a “one size fits all” strategy. Maybe they lack competence or understanding, but this doesn’t work.

When the stock market has a drawdown of 50% and half your portfolio has evaporated, the answer I most often hear my clients getting is “don’t worry, it will come back, everyone lost money.” That just isn’t true. “Everyone” doesn’t lose money. For me, that’s an unacceptable answer. It’s a put-off and in my opinion it’s callous. With knowledge and genuine concern, portfolios most certainly can be protected from large downside risk.

People quite often have no idea how or why their current portfolio was constructed and invested the way it is. I find that most people have no real interest in investing their life savings in a highly volatile stock market, but on someones advice, a large portion of their savings is subjected to very high risk. Ask anyone who was invested in the stock market as recently as 2008 how that feels.

As you enter retirement, you should understand that ultimately you have to assume ownership of your retirement portfolio, investments, and the income streams you hope to achieve. You’ll need a sustainable plan that has the potential to generate reliable income for the rest of your life. That’s the best way to ensure your success.

That’s not to say that you have to get an entire education in Financial and Retirement Income Planning. Of course not! It took me many years to gain this kind of financial and retirement knowledge. What it does mean is that you should take some time to educate yourself enough so that you can understand the procedures involved in sustainable retirement income planning.

You may want to enlist the help of a qualified financial advisor who specializes in retirement distribution planning. A significant aspect of a planner’s experience lies in the asset accumulation phase. Accumulating money while you’re working, and building a plan of distribution in retirement, are two very different disciplines. The right person will help you gain a basic knowledge of the process, and help you design a plan that can generate reliable income that you can presumably count on for the rest of your life.

The last thing you want to do is decide that you don’t know enough, stick your head in the sand, and hand the whole process off to someone else, with no understanding of how and why your portfolio is designed the way it is. Be proactive about the hows and the whys of your portfolio design. Ask questions.

You may have been working with someone for a number of years, and feel that you know them quite well. You may be comfortable, and it’s easier than starting a new relationship. I understand that, but be sure that you understand that planner’s knowledge base regarding distribution planning before you head off to the golf course. Otherwise, you risk being extremely disappointed when it’s too late to do anything about it.



Moving From Accumulation to Distribution

One of the most important things that you have on your side when you begin saving money for retirement is time. When you are 30, 40, even 50 years away from retirement, you can afford to take more risk with the way you invest your money. You want to accumulate as much as you can so that you will be able to generate a paycheck when you’re no longer employed.

When you’re working and putting money aside on a consistent basis, you’re performing a strategy called “Dollar Cost Averaging.” Dollar cost averaging actually works quite well while you are in the accumulation phase. Because you’re adding money on a weekly or monthly basis, sometimes you’re buying high and sometimes you’re buying low (assuming you are invested in the stock market or some instrument related to it).

This averages things out for you and to some extent reduces your overall risk. It does not, of course, eliminate risk. There are many fine and knowledgeable brokers that can help you with this area. However, you will want to find someone who has your best interests at heart.

Hopefully, as you make your way closer to your retirement date, you’ve moved your portfolio toward less risk. You’ve spent the last 40 or even 50 years in the workforce. Maybe you’ve raised a family, owned a few houses, taken some great vacations, and along the way have managed to set aside a few dollars. Maybe you’re lucky enough to have a company pension that you’ll be able to count on, maybe not. And for now, lucky for us, Social Security is still here.

Or perhaps you’re already staring down at the “Golden Years.” It came so fast that you’ve barely even had time to consider how to go about planning it out.

Retirement Income Planning (the orderly and strategically timed distribution of assets in retirement) begins where the accumulation of assets ends. There are many moving parts to designing your plan, and none should be taken lightly or left to chance.

One of the most difficult things for people to change, when they start thinking about retiring, is their mindset when moving from an accumulation phase to a distribution phase.

Many people continue to hold onto the idea that “how much they earn on their money” is most important—and it is, if you’re 35 and working and still accumulating assets for retirement. However, what you earn on your money is secondary and much less important once you enter retirement. What is it secondary to, you may ask? The safety, security and preservation of the very assets that will generate your income streams for hopefully 25, 30 or 40 years of retirement!

If you lose what you have, it cannot generate an income check for you every month and you may find yourself looking for a J.O.B. This is not to say that you can’t do well in retirement. You can, and you can do it with minimal risk! But the distribution of assets over many years, making sure that it doesn’t run out before you do, is no easy task. The very first thing you must come to terms with is that you are no longer in a position of accumulating money, so your philosophy has to change. You cannot leave your money in harm’s way, taking risk that simply isn’t necessary. Time will be against you at that point. You won’t have the time once you are near or in retirement, to make up a 30% or 40% loss.

When you transition into retirement your risk in many ways skyrockets. You are no longer working, and the weekly paycheck stops. All of the money that you have saved in your life is now finite. The decisions that you make will impact your quality of life, as well as your family’s.

There is an essential shift that should take place with regard to how you handle your assets when you transition into retirement. As you now know, the accumulation phase is concerned with building your retirement nest egg. The ultimate goal is to maximize your investment and savings returns over time. Then, when you reach your chosen retirement age, strategies must change.

As you move into the distribution phase, things get more complicated. You will need to monitor your withdrawal rate. This is extremely important. As an example, if you haven’t moved to a safer haven and you are withdrawing 5% or $25,000 per year from a $500,000 portfolio, and that portfolio losses 30%, its value is now $350,000. If you make no adjustments to your withdrawal, that same $25,000 now represents 7.14% of your portfolio. That’s a very big difference.

You’ll want to take a closer look at taxes and strategies available to reduce them on an ongoing basis. Let’s not forget about medical costs, inflation and large ticket items to name a few. You’ll want to consider balancing your investments for a safer, more reliable portfolio. The ultimate goal of a sound retirement plan is to keep your nest egg intact, with enough money to cover seen and unforeseen events for the rest of your days while still maintaining the lifestyle you desire.








Major Risks to Retirement Income

There are six clear risks that are associated with your retirement income. If you are going to correctly and adequately plan your retirement, then you need to take these risk factors into account as early as possible. These are the risks that can lead to the erosion of your retirement capital, which in turn will impact the amount you live on each month.

The first risk is related to longevity:

We are living in a time of advanced medicine. I’m sure you’ve heard it said: “70 is the new 50.” Retirement can stretch upwards of 30 years. That’s a lot of years to plan for. (More on this below)
The second risk is inflation:

It’s a fact of life and one financial element that most retirees fear. Inflation can cause your annual income needs to skyrocket, and can devastate your retirement over time. This is something that you must plan for, or you will be subject to dwindling income amounts as your portfolio does not correctly adjust to inflation.
The third risk is the expense of healthcare:

Because you’ll be older, you will need to ensure that your medical needs are taken care of. It’s one of your largest expenses, and one that you cannot plan enough for. One study from the Employee Benefit Research Institute recommends having $227,000 for medical expenses per couple in retirement. My personal experience with my own clients is that it can be quite a bit higher.
The fourth major risk is fluctuations related to your investment:

Assuming that your assets are invested in the stock market or some high-risk variation that is affected by it, poor market performance will negatively impact your portfolio as well as your income. If you haven’t taken the time to restructure for less risk, this will hurt. You’ll have to wait until things turn around and head back up. It can take years upon years just to get back to even, while you’re faced with taking a higher percentage of income from a smaller portfolio.
The fifth major risk is related to taxes:

When taxes go up, your income goes down.
The sixth major risk is related to public policy and legal changes:

As a kid my siblings and I would play board games such as Monopoly. Everything would be going along just fine until an older sibling came along and joined in. Minutes after the newcomer joined, she would decide she didn’t like the rules we were playing by and would change them. We followed along, of course, because we were smaller and younger. Suddenly, instead of owning nine properties (Boardwalk and Park Place included) and a wad of cash, I was broke. No money and all my properties either foreclosed or sold at a deep discount! We had no choice, no control.
Public policy changes, in my opinion, can produce scenarios remarkably similar but with far more dire consequences than a child’s game. You might design and implement the best retirement plan around the current legal structure. Suddenly, the government decides to change the rules. You will have no choice but to change with it and adapt. We have absolutely no direct control over public policy and legal changes.

*There are also devastating risks that should be addressed with regard to a surviving spouse… for another article.





Longevity and Health Care Costs Are Related Risks

Americans are living longer. The need for health care and long-term care, whether in a facility or at home, will continue to increase among retired Americans. The high costs and unpredictability of health care needs make these especially important risk factors to account for.

Health care costs: Health care costs are among the fastest-growing expenses among retirees.

Long-term care needs: An unexpected long-term care event can force an individual to enter retirement early.

A survey of pre-retirees and retirees ages 55-75 found that health care and long-term care expenses together account for 12-15% of retirement expenses, depending on the household income. Today, the average annual cost of a health-care aid who works in your home eight hours per day is slightly more than $60,000 per year.

A 2010 study estimates that health care costs for a retired couple age 65 could amount, on average, to $250,000 over the course of their retirement years. This figure does not include long-term care costs.

Longer life spans also increase the challenge by requiring that your assets last 15, 25, 35 years or longer. Uncertain taxes and inflation can undermine even the most well-thought-out and well-implemented plans.

And 55% of retirees surveyed said they retired earlier than planned. 39% were forced to retire due to health issues or job loss.

There’s No Such Thing As Too Much Planning.

Make sure you plan for the risks that can sneak up and devastate your retirement. Solid planning that leaves flexibility for changes can make you or break you. Inflation, market fluctuations, market risk, expensive health care, long-term care, inflation, tax changes and the state of the economy as well as longevity are all significant factors to account for when structuring your retirement plan. Not planning for eventualities will lead to income shortfall. Your success in retirement will depend on your own involvement as well as that of the advisor you choose to work with. Choose someone who is well-versed in the distribution phase of retirement. You can also simply educate yourself 🙂

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