You may be one of the fortunate ones; you’ve saved substantial income for your retirement. Or perhaps you still have a little ways to go to feel totally secure. One thing’s for certain: it’s important to make sure your money lasts comfortably throughout retirement so you can enjoy your post-working years to the fullest.
Economically, Pre-Retirees and Retirees have different functions of their money. A Pre-Retiree is preparing to have efficient retirement income options available to choose from at retirement time to accomplish their retirement objectives. In contrast, a Retiree needs to be able to analyze and choose from the retirement income options they have available to them at that time for implementation to accomplish their retirement objectives.
So, the purpose of any long term savings or investment is to create retirement income, liquidity and legacy for the family. When it comes to investments and saving for retirement income streams there are two common questions that virtually every Pre-Retiree has:
- How much do I need to save?
- Where do I need to put it?
Any reasonably brilliant financial planner/advisor would be able to come with a decent retirement plan that will provide tax advantages and good rate of return on your savings – “Accumulation Phase”. Unfortunately, what most investment advisors and financial planners miss is the retirement income or “Distribution Phase” because of lack of skill and it is very hard due to two issue:
- Longevity: as an individuals, we have no way knowing how long we are going to live and;
- Retirement Income Rate: when Fidelity Investments recently asked just over 1,000 Pre-Retirees what percentage of savings financial experts suggest they should withdraw annually in retirement, 19% said the recommended figure was 7% to 9% a year. That’s an amount most retirement experts would agree puts them at high risk of outliving their nest egg. Even more disconcerting, another 19% of those queried as part of the company’s Retirement IQ survey felt they could withdraw even more, 10% to 15% a year, a rate that Fidelity estimates could possibly deplete their savings in less than 10 years. In short, nearly 4 in 10 of the soon-to-be retirees surveyed had an unrealistic view of how much they could spend from savings each year without jeopardizing their retirement security. So what’s the right answer? Financial pros disagree. Fidelity suggests limiting yourself to an initial withdrawal of no more than 4% to 5% of savings, and then adjusting the dollar amount each year to maintain purchasing power in the face of inflation. That recommendation is largely in line with the 4% rule, a withdrawal regimen that traces its origins to a 1994 study by now-retired financial planner William Bengen. In recent years, however, a number of experts have challenged this rule, warning that it no longer offers the same level of assurance against running through one’s assets that it did in the past. You can read the Time Magazine’s article publish on March 6, 2017 here.
So, what is the underlying premise for all long term savings anybody does? Why are we giving up current enjoyment of our income? The answer is to have an income stream in retirement. It only makes sense then to understand how retirement income streams work so that we can direct the savings we are doing today in ways that potentially gives us the highest income when we retire. In other words, how retirement income streams work economically define how to allocate our savings today. The sooner we get on an efficient path, the greater impact we have on the results. Think of it like climbing a mountain. Is the objective to get to the top of the mountain? Or is it really getting to the top of the mountain, and then making it back down safely? This is similar to our financial lives. Getting up the mountain is our pre-retirement/accumulation phase and getting back down is our retirement/distribution phase.
The key is that this is one continuous journey. There are two rates that make up everyone’s retirement income stream later on and both are equally important. Their accumulation rate: getting up the mountain and the other is the distribution rate, getting back down safely. Knowing how retirement income streams work and then how distribution rates work, is the basis for understanding how to save money in pre-retirement. In other words, understanding how retirement incomes streams work defines how to pack your bag in pre-retirement. If we don’t have an understanding of how retirement incomes streams work in pre-retirement, we have no rhyme or reason as to how to allocate our savings today.
Retirement planning is all about protecting your hard-earned money and making it grow by selecting the right retirement investment and we are committed to bringing you innovative ideas for your retirement savings that will help you build solid a retirement plan for your golden years. Our Retirement specialists can help you to take larger income tax deductions if you qualify, while building a maximum retirement income in a fiscally prudent manner. Call (877) 972-3262 today to speak with an experienced advisor or complete the personalized proposal request form now.