A mere six years after one of the most devastating recessions (2008) in U.S. history, which destroyed many Americans’ retirement plans, I frequently saw new clients who had forgotten about the losses their portfolios took during the early 2000s. I believe it’s important not to forget what a 20, 30, or 40 percent loss feels like in your portfolio.
Why? Because another market loss can easily occur during your retirement years. When you enter retirement and begin withdrawing income to live on and not simply accumulating money, time may no longer be on your side to recover those losses. Because of this, it is vital to work closely with a financial professional to create a comprehensive retirement income plan that addresses both the good and bad that life could throw at you in retirement.
A solid retirement plan should address and shape a course of action over the next 20-30 years. The areas of focus should include: securing more predictable income for all your basic needs, longevity (will you outlive your money), market volatility, low fixed interest rates, inflation, possible higher taxes, death of a spouse (survivor income), health care costs, coordination of all your assets and accounts, insurance, and estate planning.
If you don’t have a good answer for how to tackle these areas when you retire, then I’d say you probably have some gaps in your plan. Gaps in your retirement income plan are like a boat with tiny holes — eventually you start to take on water and before you know it, it’s too late to stay afloat. Don’t let a lack of planning sink your livelihood and that of your loved ones in retirement. If you do have some gaps, simply work with a qualified professional to address them.
Consider the following planning areas as a starting point:
More Predictable Income Sources
Generating a more predictable income stream that is consistent during all market conditions, and knowing your basic living needs will be taken care of is a vital part of retirement planning for many. The stock market is not guaranteed, nor is it predictable. Therefore, money you need on a continual basis to cover your cost of living needs throughout all retirement years should not be derived from an unpredictable source.
Instead, your income should come from more predictable sources such as Social Security, government pensions, and fixed indexed annuities. This allows added peace of mind knowing where your next income payment is coming from, and not fixate over day-to-day market headlines or political rhetoric.
If you take control over income fluctuation for basic expenses, as I mentioned above, then you can worry less about market volatility. Think about this — if your basic expenses are covered by income from more predictable sources other than the stock market, then a portfolio experiencing a market loss may be an inconvenience to you, but not devastating. In long-term retirement planning, think of money invested in the stock market as a flexible withdrawal account and inflation hedge to be used over time instead of a necessary income stream each year.
Death of a Spouse
Unfortunate and untimely things happen every day to good people, so it’s important to prepare for the worst. Did you know that upon the death of your spouse, only one of the Social Security payments will continue? Depending on your age, the age of your spouse, and whether or not Social Security benefit payments have already been elected, the amount you are eligible to receive will vary. However, only one benefit will be available, either your own or your spouses, not both.1
This can translate into a significant reduction of income for many married couples, especially when they each have a large Social Security benefit. One of these benefits will be lost upon the death of a spouse and that lost income will need to be made up somewhere else.
This is why having a good plan is crucial. It’s important to properly plan for income well into your 90s, and also to take care of your surviving spouse should something happen and income sources disappear.
Coordination of Accounts
Retirement planning is just that — planning! If you and your spouse have multiple retirement and investment accounts, do you know what is in each and whether they are designed for the same investment purpose? If they are not, they could be working against one another and inefficient in meeting your goals. Depending on your risk tolerance and time horizon, you may want to consider investments designated to meet your needs today, 10 years from now, and 20 years or more down the road.
For some, this might include (a) emergency cash reserves, (b) long-term predictable income sources that we’ve previously discussed, (c) tactical investments that continually evolve to capture gains in the changing marketplace, and (d) strategic investments that seek to grow in the market over a long-range period and can help provide asset accumulation down the road.
Given the global economy we live in, investing for retirement has taken on new look. Prior generations only had to create retirement income for 10-15 years. Today you have to create an income stream for yourself for possibly the next 20-30 years. No longer is the passive buy and hold strategy adequate. Now, retirement income needs to last for almost as long as you had to accumulate it.
So, what is someone to do? First and foremost you should create a plan that is consistent with your needs and wants — one that has contingency plans built in for every obstacle that life may throw your way. Take an hour or two and meet with a qualified financial professional who specializes in retirement income planning. Initial consultations are often no cost, no obligation and may prove well worth your time. Planning now when things are going well is a better choice than waiting.
1 “Survivors Planner: How Much Would Your Survivors Receive?” Social Security Administration. https://www.ssa.gov/planners/survivors/onyourown5.html
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