Retirement really is all about cash flow and not your net worth. Over the years, I’ve met many people who have a very high net worth (usually because of the property they own) but not necessarily a high enough income to support their lifestyle. Like my friend and associate Dean says, “You can’t spend the land.”
Net worth and cash flow are not one in the same. One of the most important decisions you will make when you retire, will be deciding how you will begin to transition from a lifetime of accumulating assets to a lifetime of income. You can plan to accomplish your income goals in many different ways. One school of thought recommends you diversify between cash, stocks and bonds, and depending on your risk tolerance set up a plan to withdrawal no more than 4% per year each year. The challenge with a 4% withdrawal strategy is it can create some sleepless nights for individuals when the stock market is not behaving as anticipated.
The basic idea in my book “Thriving in Retirement” is when you create a retirement income plan you want to diversify both your time horizon and the financial tools you use to complete a laddered time segmented plan. The money you need in the short term … say in years 0-5 should be conservative. As your time horizon increases, you can begin to increase the amount of risk you can afford to take because ultimately TIME is the cure to the volatility of the stock market. The last thing you want to do is taking income from an account that is also falling in value. As you begin to create an income plan that will support you throughout your retirement you should consider a couple of key factors.
#1 What is your budget?
#2 What are the sources of your guaranteed income? Pension? Social Security?
#3 You will need to make some assumptions about future inflation.
Once we understand your goals and objectives, and we have a clear picture of your retirement income needs we can begin to create an income structure that will help support your lifestyle needs during retirement. Many people we have helped are ultra conservative. They sleep better at night when they know there is an element of safety and guarantees built into their plan. Because of this desire for safety, we will often recommend income annuities and fixed annuities to help clients reach their goals.
Insurance company’s fixed & income annuities are designed to provide safe, secure and guaranteed income streams that cannot be out lived. I generally recommend you only put as much money as necessary into annuities to guarantee the cash flow that you will need, and I recommend that you diversify the companies you use so that you don’t have too many eggs in one basket.
Below is an example case I’ve built for you to review. Essentially the clients in this example had $669,556 in assets, and they wanted to build an income stream of $25,000 per year and adjust their income needs for inflation by 3%. Please note that the assumed rate of return in the last segment of the plan is hypothetical and is not guaranteed. But the first three segments of the plan are considered safe, secure and guaranteed income sources.
In the first segment we use a single premium immediate annuity. The second segment we use a fixed deferred annuity that pays 3% per year. The third segment is a fixed indexed annuity that offers a 5.5% bonus and an income rider that has an 8% rollup on the income account value with a guaranteed cash flow of 6.3% when income is started at age 73. The final segment is a managed investment account.
As with any plan there are always going to be advantages and disadvantages. One of the problems with using annuities is they have fees and surrender charges. It’s important to make sure we have plenty of liquidity to be prepared for an unexpected emergency.
As an independent firm we have some clients tell us they would prefer not to use annuities. In that case we can create the same kind of structure by laddering CD’s and Bonds. Ultimately it is important to find an advisor that can help you create the retirement income plan you are looking for.
