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The Accumulation Phase is the Missing Link

Written By: Cal Burgess, Retirement Servicing Group

With respect to income and retirement planning, there are 3 phases of life. The introduction phase, the accumulation phase, and the preservation phase. The second phase, the accumulation phase, is the phase of life where you accumulate funds to retire (working years of life), pay off as much debt as possible, and try to achieve the best quality of life you can. This is the phase that is destroying the American dream of retirement.

Most of us grew up with the illusion that if you get an education, you’ll work for a great company and enjoy a comfortable retirement. Those days are over. Education (the introduction phase) still is a vital step in preparing for your career path; however, working your entire life in exchange for a pension plan is an envied dream to most Americans today, and nothing more. Unless you are a government employee, the odds of having a guaranteed income stream throughout retirement is out the window. This is why the planning process must be revamped when discussing the accumulation phase. You simply are not able to work for 30 years, get a gold watch, and have a check coming in month in month out. Today, the accumulation phase of life requires a calculated approach depending on your financial goals.

The odds of an individual under the age of 45 receiving social security starting (earliest) at the age of 62 is highly unlikely. With the amount of baby boomers set to retire in the next 15 years, the social security well will run dry. When you take into consideration that most retirement strategies today are deferred compensation plans which are market linked, the scenario can become quite concerning. Most deferred compensation plans have either broke even over the last decade, or have lost value. So in order for one to get back on track, they are likely to have to double the historic return in a global recession; a highly unlikely probability. So what is the solution to this dilemma? Financial guarantees.

There are products today specifically designed to provide an income stream for life with all of the flexibility above and beyond the traditional pension plan. Many IRAs, 401ks, and other pre tax dollar investments have been converted into specialized products that can guarantee an income stream for life. Informed Americans are converting their deferred compensation plan into these vehicles simply because their need for an income stream during retirement greatly outweighs the burden of hedging against risk in a global recession. The truth is most IRAs in retirement are used as an additional income stream or are passed on to loved ones as a legacy.

Let’s take a closer look at how lifetime guarantees are helping protect against the absence of both the traditional pension plan and social security. Assume John is 50 years old and has been in the workforce (accumulation phase) for 25 years. Since the age of 25, he has been maxing out his 401k contribution each and every year. Three years ago John was laid off and started a new job with a lower salary soon after. Since his current employer is not matching his 401k he sees no incentive to roll it over to that product, not to mention he cannot afford to with the reduction of income. John has not done well on his return over the last 10 years, and was lucky to break even. Today the balance on his old 401k is $150,000. John does not have a pension and wants to retire at the age of 65. His sole objective is to provide an income stream for his retirement years, as he knows he is behind in his planning and does not have a pension plan. Furthermore, he realizes that counting on social security to be available 12 years from now (at the soonest) is pretty much hit or miss. For these reasons, John explores a lifetime income approach. If John were to roll over his 401k into a traditional IRA and utilize financial guarantees, he would be eligible for an income stream of over $1,650 per month starting at the age of 65 without adding one more penny to his account. This income stream would be guaranteed for life, regardless of any future market conditions. As an added benefit, if John were to ever become sick or have to go into assisted living, he would have instant access to all of his cash value without penalty.

There are many Americans that have very similar circumstances to John. The number one fear in retirement today is the fear of running out of money. Just 10 years ago the number one fear in retirement was the fear of death, as it was for several decades before. As financial times change, so do retirement trends. The financial crisis has caused many people to exit market strategies in exchange for an income stream guaranteed for life; especially without having a pension or being able to receive social security.

Americans for the most part do not have a contingency plan in place. Unfortunately, there has not been enough of an emphasis on the importance of income planning. In a global recession, priorities are placed in short term solutions aimed at the current state of the economy, failing to address long term goals. The financial goals are concentrated to the economy as a whole, and rarely dedicated to financial guarantees in retirement. With the Federal stimulus and the struggling economy, the individual has an inherent responsibility to plan for their future income outside the recommendations of a financial planner. Knowledge is the key. The more avenues you explore with respect to retirement planning the more likely you are to achieve your financial goals.

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