As you consider all of your financial options, there is one simple question or thought that you must filter your decisions and strategies through to have a successful, independent retirement. However, before you can look at various solutions, you have to understand the needs of your household. Once you know how much your monthly expenses are and how much you need for income in retirement, you are now ready to take the next step.
The single most important question that you and your advisor must now consider is, “What is the purpose of my money?” It might sound a bit elementary, but you have to watch out for misplaced, underperforming dollars. Most people want some combination of safety, income, growth and liquidity, but there is no product out there that can give you all of those things. What you can do is purpose each dollar to have the best chance to accomplish exactly what you want it to do. You have worked very hard for your money, and now you deserve to have your money work hard for you.
During the last 30 to 40 years, you have been in the accumulation stage of your life. You have been contributing to your retirement, paying off debt, and trying to grow your wealth. Most likely, you have been aggressively looking for high market returns, while understanding that this position comes with market risk. However, with retirement comes a new financial stage of life called the wealth preservation stage, and your money needs to move with you. Let me illustrate the importance of this transition.
Have you have ever visited Charleston, South Carolina? If you live there, you already know our city is famous for its history, shopping, dining, lodging, beautiful beaches, and tidal rivers. If you have not visited before, do yourself a favor and make it happen soon! Anyway, back to the point: Those tidal rivers really provide a great illustration, because if you run across the Cooper River Bridge or eat along the Charleston Harbor, you will see the water flooding inland for a period of time (i.e., accumulation stage), and then, like clockwork, the flow reverses and starts flooding back out to the ocean. While working and contributing to your 401k, IRA, etc., money was pouring into your account and hopefully growing. In retirement, those funds must now start paying you a desired amount and never stop! I am sure you remember what happened to your account balance during the last two major market corrections. Can you afford a 50% loss at this point in your financial journey? Of course not! Your biggest financial fear might be that your “river” could run dry in retirement. Fortunately, with your money allocated to accomplish a purpose, you can achieve security and independence now, no matter what the future may bring.
Let me explain this point using the story of a real life client we will call “John.” John might be just like you. He is a hard worker and did a really nice job saving during his working years (accumulation stage). He grew his 401k up to $600,000 and was really looking forward to retiring on a lake in the upstate of South Carolina. Well, the long-awaited time came to retire in 2007, and he rolled his money out of the 401k into a managed account in the stock market (wealth preservation stage). His new broker told him that he was safe to withdraw 5% ($30,000) each year, so that is exactly what he did. He jumped into retirement with both feet and bought a nice truck and boat to enjoy long days on the water fishing, relaxing and kicking back. He also tried his best not to worry about his money, but remember, we are now in the thick of the 2008 market correction! Both John and his wife decided to try and enjoy retirement and not stress over his account balance; after all, he was told they would be fine withdrawing 5%. Over a year passed and they couldn’t stand the anguish any longer, so they finally decided to open his dreaded monthly statement and look at the account. The balance was a mere $200,000!
“How could that be?” John begged me when we first talked. “My broker told me I could pull $30,000 out each year and I would be fine!” I explained to him how devastating market losses are to an account when income is consistently withdrawn, and how hard it would be to recover those losses. Then, we developed a plan that put a floor under his money to provide the safety and income he wanted. John’s purpose for his money was not placed in the correct position, and that is a lesson better learned from someone else.
Write it down, because this concept can radically change the direction of your retirement: Purpose determines placement. Your next step should be to find an honest financial professional that is committed to solving problems, not to selling products. Have them listen to you so they understand your goals and concerns. Build a plan that provides guaranteed lifetime income that will never stop, even if you run out of money. Purpose any additional money to safely grow to offset inflation, or provide for loved ones and future generations. Make sure you minimize taxes on your income and estate. Once you trust your advisor, you can develop a strategy that puts every dollar to work, so you can achieve the life you imagined in retirement. You should not simply survive in retirement – I hope you can thrive!
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