by Dave Kutcher
We have written on this topic many, many times but the importance of proper planning to achieve the retirement you dream of is vitally important. You can’t arrive on the doorstep at age 67 unprepared and expect the years ahead to just serve you as best you can be served … if you want the most from your retirement years you must start early planning and consider important things such as your investment risk tolerance, how much income you need guaranteed each month and how flexible you can be with your spending plans.
The trend today in how to achieve a plan that maximizes efficiency and minimizes anxiety and stress attributed to concern for outliving our money has moved to a design that allows flexibility in spending based upon the reality of what is occurring during your retirement rather than a fixed plan based solely on assumptions.
Inherent in this new strategy is the importance of guaranteed lifetime income sources and how they can allow for higher spending overall without knowing how long a life we have ahead and thus how long we need to provide ourselves income.
The risk of living longer is not the same as other investment risks … taking more risk in investments to seek better returns comes with downside risks, but also has opportunity to provide higher than expected returns…so, people take these risks expecting higher returns on their money than had they not taken that risk. The risk of longevity is not the same … neglecting to insure against the chance of longevity (taking more risk) does not provide upside potential because it changes how you have to approach your overall investment strategy otherwise and then more stringently impairs your spending flexibility, ultimately providing less financial benefits for you to enjoy your retirement.
The decisions and availability of utilizing lifetime income sources and establishing asset allocations that meet your investment risk tolerance are key to achieving a better lifestyle with less stress.
Asset allocation choices drive expected returns and in a traditional investment portfolio the plan for more stable, fixed returns comes for the bond side of the equation. While long term earnings from bonds may provide some stability and reduce volatility overall, the lower returns than the equity side of the market will limit your spending and likely won’t keep up with inflation.
We consider fixed income sources such as social security, pensions and lifetime annuity payouts to be in the bond side of your portfolio … but the lifetime income component of these plans is different than owning bonds yourself. Lifetime income sources provide a stable spending pattern and alleviate the concern of outliving your income.
When contemplating moving money in your investment portfolio from bonds to a lifetime income source, you allow yourself to be more aggressive with the remaining funds in your portfolio and ideally achieve a better overall outcome of returns over time while resting your concerns for longevity on the fact that you have enough lifetime income sources to cover your essentials no matter how long you live.
Knowing you have your bases covered, you will more thoroughly enjoy your retirement years and be able to incorporate more flexibility into your spending decisions … taking advantage of higher earning years in the market and enjoying these additional funds without trepidation of the longevity risk.
There is no “one size fits all” with these planning strategies. Everyone is different. Working on and designing a plan that fits for you is important … don’t settle for cookie-cutter solutions. Embrace this chance to plan your own destiny.
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio and on Tuesday mornings, KFQD News Talk Radio AM 750 and FM 103.7. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
