It is critical to understand the various financial threats in retirement that you will face over the long run and to plan accordingly so your retirement years are smooth sailing. For the most part these challenges are things you already understand, but most likely you do not know how to solve them.
Previously, we looked at the value of a guaranteed, pension-like 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.
Any of these threats individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.
Longevity risk simply refers to the risk of outliving your assets.
While this could be the scariest issue of all, in reality, it is probably the easiest to problem to solve and will lessen the impact of all other threats.
Solution: If you have guaranteed lifetime income, you know you can never outlive a paycheck. As I wrote previously, “Without guaranteed income, you could be relegated to constant worry over appropriate spending levels.” Negative investment performance could be a devastating blow to your lifestyle.
That risk 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 or early on in retirement. One IRA statement we recently reviewed 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? Simple…
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.
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 fully insulate 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 the rest of your money grow for tomorrow so it is available to provide what you need in the future.
Mitigating Financial Threats Summary:
This all fits together and comes back to one simple theme: Guaranteed Lifetime 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.
This is why everyone needs and should want a stream of guaranteed lifetime income.
The major benefits are knowing you’ll never run out of income, 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 page we 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.