Let’s Admit It: We All Need Retirement Income
No matter what situation you find yourself in, whether you have $5 million or $50,000 saved for retirement, we can all agree that retirement income is the foundation to every financial plan. A house without a strong foundation can never become a safe home to dwell in. In the same way, a financial plan will not be successful if retirement income is not adequate to cover your lifestyle. One of the most important pieces to factor in are guaranteed income sources like Social Security and/or pensions. First off, you’ll want to make sure you’re maximizing your Social Security options (and that could be an entire article in and of itself). But then also, only 1 or 2 out of every 10 baby boomers retire with a pension today, so you can’t necessarily count on a great pension like the good old days. Even if you do have a pension, your Social Security benefits and pension may not completely cover all of your expenses. So, in 95% of cases, there is still some additional income planning needed above and beyond Social Security and pensions. So what are the most common ways to plan for these income needs in retirement?
The age-old, most common way of planning for income has been systematic withdrawals. This strategy consists of having a diversified investment portfolio and systematically taking a withdrawal from the accounts, historically between 4-5% of the portfolio. In other words, if you have a $1 million portfolio, taking $40,000-$50,000 a year from your account supposedly will keep you from drawing down too much principal during your retirement years. This strategy worked for decades (back when the stock market went consistently up, and bond yields and CDs paid a good interest rate), but the volatile environment we see in the stock market and the low-yield nature of the fixed income world gives this strategy some difficulties. According to a recent article by Morningstar Investment Management*, due to the environment we’re currently in, taking under 2% of the portfolio year by year has a higher probability of making sure you don’t run out of money in retirement. This strategy may still work for a multimillion-dollar family, but for someone with $1.5 million or less saved for retirement, this strategy will have a lower probability of success since there may be more income needed than what they can safely draw down without fear. This is not your parent’s retirement! We are in a completely different environment when it comes to portfolio yield and volatility. The old ways simply will not work anymore.
A more recent income strategy which has come to replace systematic withdrawals is what’s known as flooring. This method has been used over the past several years and can oftentimes give a client more stability in planning for their retirement income. This is how it works: First, you need to decide what your monthly spending need is in retirement. How much do you need to run your life? That number should be a monthly number which can cover all of your basic expenses. The flooring strategy creates a “floor” or “foundation” of this monthly income coming in on a consistent basis. The way to achieve this is by investing in an underutilized financial tool which can provide lifetime guaranteed income, without bringing risk to your principal. There are also ways to make the lifetime monthly income grow year by year to hedge against inflation. We create this floor by using the smallest amount of money possible in order to generate that monthly income. The percentage of your portfolio devoted to creating this floor will vary from client to client due to a number of factors being portfolio size, tolerance for risk, monthly spending needs, or liquidity concerns. Then, once you’ve provided a monthly income that’s guaranteed to never run out, you can have the rest of your portfolio be invested with confidence. You can let that portion be utilized more for growth so you can fight against future inflation, higher taxes, and healthcare costs. You can allow that section of the portfolio to experience the ebbs and flows of the market, because you’re not reliant on that for your basic living needs (the floor has taken care of that). We oftentimes call this the paychecks (consistent retirement income) and the playchecks (growth oriented liquid accounts to be used for vacations, inflation, taxes, or healthcare).
The last strategy we will consider is called bucketing. This is by far the simplest to get your head around due to its structure. The theory here is to organize your investments into separate buckets based upon the timeframe in which you anticipate using the funds. For instance, you might have a short-term needs bucket for 1 years’ worth of income sitting in cash equivalents gaining very little interest. The second bucket would be your 2-5-year bucket, which has some investments with growth potential but is invested more conservatively since there is a shorter time horizon associated with it. Your third bucket would consist of investments more moderately or aggressively invested since you will not be accessing these funds for 6-10 years. Then, for many families, there is a “never” bucket devoted exclusively to estate planning for their heirs. This can then give them the freedom to spend their portfolio how they choose without having to worry about what they will leave their family as an inheritance. The more difficult part is how you transfer funds from one bucket to the next in the most tax-efficient manner all the while preserving and growing your portfolio. This strategy is by far the easiest to comprehend and can be a great method of potentially making your portfolio last longer.
Will you have enough income in retirement? Would you like to see preserve your wealth, take the income you need, and grow your portfolio in the process? Call or email us for our no-obligation second opinion service**!
*Low Bond Yields and Safe Portfolio Withdrawal Rates, Morningstar Investment Managementhttps://corporate.morningstar.com/us/documents/targetmaturity/LowBondYieldsWithdrawalRates.pdf
**Complimentary Second Opinion Service includes: Retirement Income and Expense Analysis, In-depth Portfolio Analysis, Stock Intersection Report, Risk Analysis, Fee Analysis, Social Security Maximization Report, and Pension Maximization Report.
Questions, comments, concerns? Feel free to contact me!
732 364 5462
At Family Focus Financial Group, Rich develops unique retirement strategies for his clients and recognizes that there is no one-size-fits-all approach. Rich is committed to developing both a custom strategy and close relationship with each client. He believes maintaining a relationship with our clients will ensure their strategy is always on course to reach their goals. Rich Feola maintains an insurance practice and the fiduciary standard of Investment Advisor Representation, a series 66 licensed registration, with Global Financial Private Capital, an SEC Registered Investment Advisory Firm.
Neither of the methods “flooring” nor bucketing guarantees anything. Past performance is no guarantee of future results.
*Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Advisor. Global Financial Private Capital and Family Focus Financial Group are not affiliated companies. Not intended for specific legal or tax advice. Any views expressed are for information purposes only and should not be construed in any way as an offer, an endorsement, or an inducement to invest or purchase insurance products.