Financial Threats In Retirement
Welcome back to the second installment in the pension income series where I plan to name the threats to your portfolio while drawing retirement income. It is very important to understand the various challenges you’ll face over the long run and plan accordingly so your retirement years are smooth sailing. For the most part these are things you already understand but haven’t yet figured out how to check them off the list.
Last week this series began with a brief introduction to the value of pension income- a steady, guaranteed stream of cash flow through retirement. Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about this week.
Any of these individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all. If you are just joining us follow the link at the top of the page to read last week’s post.
Without further ado, here we go… The biggest challenges to maintaining a certain standard of living in retirement are longevity risk, market volatility and inflation. Sounds like a nasty list, doesn’t it? Recognizing the problem is the first step and the first step is always the hardest.
Longevity Risk- Of all the ways this can be defined, in regards to you and retirement income, longevity risk simply refers to the risk of outliving your assets. While this could be the scariest issue of all it is probably the easiest to problem to solve and will lessen the impact of all other threats. This directly relates to last week; if you have guaranteed lifetime income you know you’ll never outlive a paycheck. As I wrote last week, “without guaranteed income, you could be relegated to constant worry over appropriate spending levels.” Negative investment performance could be devastating to your lifestyle, but can be eliminated by a guaranteed source of income.
Market Volatility Risk- Market volatility can mean the difference between a happy retirement and a stressful retirement. Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement. One IRA statement I reviewed the other day showed a meager 1.76% annual yield after more than 20 years of saving and investing. This is dismal performance, especially when it’s just a few years from retirement.
In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets. How do you escape this trap? Guaranteed lifetime income. Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels. When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.
Inflation Risk- This one is tricky. As they say, a dollar just won’t buy what it used to. Now I don’t care what anyone says, there is no action you can take today that will protect you from inflation tomorrow. Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets. In economic circles that is called lost opportunity cost. The key to beating or at least mitigating inflation is to remain flexible. Lock in what you need now and let your money grow for tomorrow so it is available to provide what you need in the future.
This all fits together and comes back to one simple theme: guaranteed income protects you and allows you a choice in retirement. No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels. No one wants retirement income to be subject to the whims of Wall Street. No one has a clue what a dollar will buy in 20 or 30 years. That’s why everyone needs and should want a stream of guaranteed lifetime income. The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.
In the next part of this series I’ll examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution. It’s time to unlearn everything you’ve been taught.
Thank you and have a great week!
Bryan J. Anderson