The success of your retirement is not really about your assets. Assets can be lost, stolen, swindled, sued, divorced or decimated in a market crash. The success of your retirement will more likely depend on:
How much guaranteed lifetime income do you have?
Have you taken the key retirement risks off the table?
Retirement Income Planning requires a paradigm shift in the way one thinks about planning for retirement. After spending a lifetime accumulating investment assets for retirement, one has to begin thinking about ways to provide income to spend during the retirement period. While the focus of the accumulation phase is on average returns, the focus during the retirement phase becomes the sequence of returns and the rate of withdrawal. The question to ask in retirement is how much of my assets can I take out each year and make sure that I don’t run out of money? This is called the withdrawal rate risk.
Morningstar recommends that a safe rate of withdrawal is 2.8%. On a $1 million dollar retirement portfolio, that is $28,000 per year. If the stock market has averaged returns of 8% per year, why is their recommended withdrawal rate so low? Because the rate of withdrawal has to take into account that you may be withdrawing your money during years when market returns are negative. Your principal must stay invested in order to recover from these down years. This is called the sequence of returns risk.
According to a recent Time magazine article, “securing at least a base level of lifetime income should be every retiree’s priority, at least if they want to live happily ever after.” There are three sources of guaranteed lifetime income – Pension Plans, Social Security and Annuities.
Social Security and Pensions are lifetime income annuities. All too often, Social Security is a retiree’s only source of guaranteed lifetime income. Fewer and fewer employers are offering pension plans to their employees. Whatever you are short from your social security and pension to cover your basic living expenses, you need to purchase more guaranteed lifetime income from an insurance company in the form of an annuity.
For these reasons, you should work with your retirement planning professional to develop a retirement income plan and to make sure your plan is fully funded with sufficient sources of guaranteed lifetime income. The retirement income plan will determine the minimum amount of income that needs to be funded with annuities and provides assurance as to how much can safely be set aside for short-term liquidity needs and long-term, growth oriented investing.