Suppose you’re still in the “accumulation” stage of life, which typically starts winding down five to ten years from retirement. In that case, investment returns can be an essential consideration for achieving your money goals. Once you retire, however, it is income that matters much more than returns. As you transition into retirement, you must make an effort to revise your mindset and evolve from a returns chaser to an income accumulator. A mindset shift won’t be easy. That’s why it’s essential to begin the process well before you plan to retire or increase the risk of outliving your assets.
When you’re in your 20s, 30s, and 40s, many, if not most, of your money goals require you to save and invest fixed amounts that you’ll use on a specified future date. You’ll use this cash all at once to fund a major purchase, such as making a down payment on a house. Or, you might use this set-aside money over several years to purchase a business or pay for education. However you spend these funds, you can use an assumed inflation rate to determine how much you’ll need.
Your ability to achieve money goals during the accumulation phase is dependent on several factors.
One of these factors is the amount of time you have after deciding what to fund and the due date of the required amount. Another determining factor is knowing the rate of return needed to achieve your goal. The greater your return, the fewer dollars needed to achieve your goal. Our current low-interest-rate environment provides few opportunities to get solid returns from fixed-income investments such as certificates of deposit, annuities, or bonds. Desperate investors chased after magical “Yieldacorns” more than any other time in modern history, sometimes with disastrous results.
If you are in your 40s, 50s, and 60s and want to retire successfully, you must pivot, shifting your attention from seeking returns to creating income streams. A successful retirement relies on having a predictable, sustainable income to cover living expenses. This consistent income is essential if you want to minimize the possibility of outliving your assets. The retirement phase, unlike asset accumulation, is an open-ended proposition with many unknowable variables.
The retirement date itself can be challenging to determine. You might have an age in mind, but what if you have to accelerate that age due to unforeseen health issues or a family crisis? Or, what if you enjoy your work and decide to defer retirement? And, of course, the thorniest problem of all is that you cannot know how long you will live. After their paychecks stop, some Americans could have thirty or even forty years of life left.
Additionally, it would be best to plan for the likelihood that you or your spouse will have continuing health-related expenses or need long-term care. For these reasons, if you are in your 40s, 50s, or 60s, you must move your attention away from investment returns and focus on retirement income accumulation. At this point, it might also be wise to seek guidance from a qualified retirement income specialist who has the proper training, tools, and product knowledge to guide you in this transition.
Unlike other types of financial planning, retirement income planning must be agile, quickly adapting when the unexpected occurs. A retirement blueprint must include strategies for minimizing taxes. Social Security planning, turning assets into income, Medicare, long-term care, housing, insurance, debt elimination or reduction, qualified plan options, general aging issues, estate planning, and other relevant issues. It is essential to partner with an advisor with the proper skillsets to design your best retirement. You should also look for a fiduciary planner, indicating their commitment to act only in your best interest.
Summing it up: Retirement income planning is a highly specialized endeavor requiring a shift in how you think about money. You can no longer afford to chase after Yieldacorns and must now focus on creating a stream of income that you won’t outlive. Planning for the time when you no longer work also means seeking guidance from a highly-trained professional with the right tools to make your transition to retirement less stressful and more prosperous. Contact my office today if you’d like to discover more about the retirement income process and how to make it more effective and efficient.