Retirement Income Planning
Posted Dec 13, 2019
Choosing the right investments to get you through your retirement years successfully can be an overwhelming experience. There are stocks, bonds, mutual funds, ETFs, CDs, money market funds, deferred annuities (fixed, indexed, and variable), immediate annuities, life insurance, real estate and I’m sure a couple more that I’m forgetting about. The point is, if you’re retiring, you know you have to pick the right investments to ensure that you don’t run out of money in retirement. This can be daunting and it can be easy to just avoid the problem and not do anything by staying in cash. No one has ever lost money by staying in cash, right?
The most common fear about investing during retirement is a bear market and losing all your money. While this is certainly a terrifying event, the number one risk during retirement is not the market going down. The number one risk is the constantly increasing cost of goods and services. We are talking about inflation, the silent killer. Think back twenty years and what the price of gasoline was. I was 16 years old and a gallon of gas cost $0.89/gallon. Now that gallon of gas is $2.50. While this is a bit bigger of an increase than CPI at 54% it’s still a great example of how retirees are subjected to inflation and how being too conservative during retirement can have disastrous results.1
By investing in stocks, retirees are able to purchase assets whose total return (capital gain and dividends) have historically outpaced inflation by a significant margin. This provides retirees the greatest chance of maintaining their standard of living as well as having their money outlive them. Now I’m not saying that every retiree should go out and put 100% of their money in the market if they have a low-risk tolerance but they should probably have a higher level of exposure to stocks than they think.
One thing you must also guard against is the sales pitch for indexed or variable annuities to guard against inflation. Despite their “promises” and how they are sold, these deferred annuities won’t keep up with inflation once you start taking distributions out them because of the high fees and performance caps the insurance companies put on them.2 This means that you’ll find your money being able to buy less and less every year when you get the same payment 30 years later. These deferred annuities can also cause taxation issues when it comes to distributions and inheritance issues if they are purchased with non-qualified money (not an IRA), but that’s a different story. This isn’t to say that all annuities are bad, but they are complex investments that need to be implemented very carefully into a portfolio and tend to be sold inappropriately.
My goal when working with retirees is to have an easily understandable, transparent, low-cost retirement income plan that keeps up with inflation. If you want impartial and fiduciary advice, talk to me, a fee-only financial advisor that doesn’t get paid on the sale of investment and insurance products.
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