Retirement Income Planning
As you begin to think about preparing for retirement, you may ask questions like the following:
How much do I need to save for retirement?
Where should I invest my money before and after I retire?
When can I retire?
How much income can I plan for in retirement?
Or, how can I be assured that I won’t run out?
Additionally, we recommend you engage the following questions, “If you knew you were doing something wrong, when would you want to know?” and “If you could potentially increase your retirement income by 30-50% without saving any more money or take on any additional risk, would it be worth your time to learn how?” Of course! As a client of McKell Partners, we’re thinking about your end goals and our job is to help get you there in the most efficient way possible.
If you’ve been paying attention, you know that America is facing a Retirement Epidemic. The rules have changed and many are unfortunately on the wrong path.
Let us share with you what we believe to be a more efficient approach. Learn more and watch The Retirement Savings Dilemma video in the Learning Center.
Are you in the public or the private sector?
Most in the public sector have a Defined Benefit Pension Plan which secures a guaranteed lifetime income stream in retirement. These instruments likely have survivorship provisions allowing lifetime income to pass on to a surviving spouse. This actuarially-based component becomes a powerful feature for individuals and families seeking security and peace in their golden years.
Conversely, for those in the private sector and for independent business owners the rules are much different. The most obvious first conclusion might be to save more money. For many, if you are not saving at least 15% of your gross income, you may want to consider rearranging your priorities. With 10,000 baby boomers retiring every day, “The retirement income deficit, meaning the difference between what people have saved for retirement, and what they should have saved at this point, is a staggering $6.6 trillion.” Reference: USA Today, 5 Questions With Sen. Harkin on Retirement Crisis, Feb 1, 2014.
Although saving more is important, retirement preparedness is not solely about accumulating a large asset by retirement. Rather, it’s more about crafting an income stream that will last your lifetime. Although these may seem similar, they are actually two completely different objectives and in practice yield vastly different results. At McKell Partners, we understand this difference! Through our consultative process we help our clients craft meaningful retirement income strategies which yield far greater results than simply pursuing an “assets-only retirement.”
What is an “assets-only retirement?”
An “assets-only retirement” means accumulating money in some form of after tax or pre-tax savings like an IRA, 401k, 403b or 457 plan with the goal to live off that asset in retirement. Similarly, a business owner typically plans the sale his or her business at retirement to produce the assets necessary to live on later. People not covered by some sort of public pension plan, which equates to millions of Americans, fall into these two groups.
There are three serious pitfalls to an “assets-only retirement” strategy. Consequently, this strategy will likely not provide the income you desire in retirement, but could provide much more if properly positioned.
Here are three pitfalls to why an “assets-only retirement” may fall short:
Pitfall #1: Actuarial Science
– Defined Benefit Pension Plans incorporate actuarial science, but Defined Contribution Plans (401k, 403b, 457) do not. As noted previously, pensions provided lifetime guaranteed income with lifetime survivorship benefits. Defined Contribution Plans by themselves lack this important financial power. The key is to get actuarial science back into your retirement.
Pitfall #2: Constant vs. Fluctuating Interest Rates
– The main problem in retirement is withdrawing income for living expenses in a fluctuating interest rate environment since assets typically remain at risk in the market during the spend down phase. Most assume we live in a constant interest rate environment. We do not! Depleting assets for living expenses in a down market can be devastating to your retirement nest egg. Meaning, you run the risk of running out of money!
Pitfall #3: Withdrawal Rate Risk
– Understanding Pitfall #2, do you know the appropriate percentage you can withdraw from your retirement asset and be assured you won’t run out of money? Extensive research has been conducted by some of the best economic minds to determine this percentage. A January 21, 2013 research paper by MorningStar titled “Low Bond Yields and Safe Portfolio Withdrawal Rates” concluded “a 4% initial withdrawal rate has a 50% probability of success over a 30-year period.” I don’t like those odds, do you? Google search the Wall Street Journal article by Kelly Greene entitled, “Say Goodbye to the 4% Rule.” Conventional wisdom has dictated a 4% withdrawal rate, but current research suggests 2.8% to 3.5%. These withdrawal rates will likely not get you the income you are expecting in retirement.
As you can see, Retirement Income Planning can be complicated!
Addressing these three pitfalls is essential to creating efficient income streams in retirement. At McKell Partners, we help you address this retirement income dilemma and provide some options you may have not seen before. We make education and learning a priority. If necessary, we dive deeper into providing efficient strategies tailor-fitted to you. Our primary focus is to help maximize retirement income and getting you to a place where you can experience financial peace.
Now, if you’re just underway and want to take Retirement 101, no problem. We can help you get started. Saving more is always useful. We can help with that as well with our Investment Advisory & Management services. But, for solving the retirement income problem and a host of other problems, ask yourself, how efficient am I utilizing the assets I’ve worked so hard for? Have you positioned your self in such a way to successfully address longevity risk or are you concerned you may run out of money? No need to fear – we have experience in these areas. Watch this video and give us a call. You’ll be glad you did!
Source: McKell Partners