The modern retirement has evolved: we are living longer, fewer families have reliable pension income, and fixed income rates have dropped to near zero levels. The search for yield is a challenge for investors and advisors alike. The 4% withdrawal rule which was deemed to be safe in 1994 has been revised in 2013 to the 2.8% rule. The risks of outliving your income are a valid concern but are they due to market losses or rather inflation.
The two financial marketing behemoths: Wall Street Banks and Insurance companies - would have you believe there is only one way to manage your retirement needs and that the other is a sure-fired path to failure.
The Insurance industry would suggest that Wall Street is a gamble with your money. Their arguement is that market losses are the greatest threat to your retirement and that you should transfer that risk through annuity contracts. The focus is on income protection.
The Investment industry says the guarantees in annuities are expensive and make for substandard returns. They believe market losses can be controlled through diversification strategies. They contend the greater risk to a retiree is loss of lifestyle due to investments not keeping pace with inflation thus reducing your long-term purchasing power and standard of living. The focus is on asset protection.
Both sides make great arguments - which is to be expected when you think of how much money has been spent on marketing slogans tailored to the retiring baby boomer. The problem is trying to find a sensible balance in all of the noise. Both strategies can work independently but planning for a 30 year retirement requires a balance of all possible obstacles and solutions.
The best answer to any complex problem is always - It depends. Each client has unique circumstances and values which predicate the best path forward. Financial Planning can help design the optimal portfolio but it requires buy-in by the client to provide the best execution. The goal from a planners standpoint is to create the highest safe withdrawal rate that matches the personality of each client.
A modern retiree needs 3 things:
1) A income stream throughout the remainder of life
2) A source of liquidity for unanticipated obstacles
3) Inflation protection to meet the inevitable escalating costs of living
Whether you consider an income protection or a asset protection plan - make sure you haven't harmed your situation by believing there is only one right way of doing things.
RETIREMENT INCOME PLANNING
To learn more about stress testing potential combinations
INCOME PROTECTION PLANNING
To learn more about the downside protection provided by Insurance
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