Retirement Planning for Higher Income & Less Stress in Golden Years

You may be one of the fortunate ones, having saved up a substantial amount for your retirement. Perhaps, though, you’re still on the road towards feeling totally secure with your retirement. Regardless of where you stand, we’re all on the same financial trek towards a comfortable retirement. On this journey, it’s important to make sure your money lasts comfortably throughout retirement so you can enjoy your golden years to the fullest.

Depending on which category you fall into, your money will play a different role. If you fall into the pre-retiree category, or are over 40 years but are more than five years away from retirement, then you are looking to have efficient retirement income options available to choose from when it comes time for you to leave the workforce. If you are already retired, or five years or less away from it, you are considered a retiree and will need to be able to analyze and choose from the income options that you have available to you in order to accomplish your retirement objectives.

So, the purpose of any long-term savings or investment is to create retirement income, liquidity, as well as a sizable inheritance for your loved ones. However, when it comes to accumulating retirement income and inheritance, or legacy, there are two common questions that pre-retirees have:

1. How much do I need to save?

2. Where do I need to put it?

Any decent financial planner or advisor would be able to come up to answers to these questions with a retirement plan that will provide tax advantages and a good rate of return on your savings during what is known as the “accumulation phase” of retirement. To put it simply, the accumulation phase started when you showed up for your first-ever day of work and, if you’re not already retired, has continued every year since. Unfortunately, many investment advisors and financial planners fall short in appropriately planning for the “distribution phase,” or the retirement phase when you are actually spending the money you’ve accumulated over your working life. The two factors these advisors miscalculate are:

  • Longevity, or how long you are going to need to draw from your retirement
  • Retirement Income Rate, or what percentage of the funds will be withdrawn over a span of time to maintain a certain lifestyle

These two factors, while seemingly separate, blend together when you consider the implications of misunderstanding your retirement income rate. A survey done by Fidelity Investments illustrates this. They asked over 1,000 pre-retirees what percentage of their savings financial experts suggested they can withdraw annually in retirement. Of respondents, 19% said they believed they could withdraw 7-9% of their total savings each year. That’s an amount most retirement experts would agree puts them at very high risk of outliving their nest egg.

Leading to an even more bleak outcome for retirees. In short, nearly 4 out of 10 of the soon-to-be retirees surveyed had an unrealistic view of how much they could spend each year without jeopardizing their retirement security.

You’re probably wondering, what is the right answer to this question that almost 40% of the aforementioned respondents got wrong? Financial professionals disagree on the exact percentage, but many, including Fidelity, agree that it should be no more than 4%. This is in line with the results of a 1994 study done by a now-retired financial planner, William Bengen. This study has risen to prominence amongst financial planners and has become simply known as the “Bengen rule.” Though it is worth mentioning that experts are beginning to question this number due to instability.

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. “The problem is that at today’s low interest rates bonds can’t provide the same level of income they previously did,” says Wade Pfau, professor of retirement income at the American College of Financial Services. “That means investors have to rely more on the equity portion of their portfolio to support withdrawals.” Since stock returns are highly volatile, if you withdraw more than you earn in a particular year, you have killed a portion of your working principal that is then no longer available when stock market goes up.

So, what’s the point of it all? Why are you giving up your current enjoyment of your hard-earned dollars to save for retirement? The answer is so that we have an income stream even after we retire. The best way to do that is to understand how retirement income streams work so that you can direct your savings in ways that will literally pay off later.

The sooner you get on the path towards maximizing your savings, the greater the outcome will be. Think of it like climbing a mountain. Is the objective just to get to the top of the mountain? Yes, that’s part of it but it is equally important to get safely back down the mountain. In our financial lives, getting up the mountain is saving for retirement, or the accumulation phase, while getting back down the mountain is making the money last for the rest of our lives or the distribution phase.

The Economic Power of Combining Two Rates:

The first economic power we all have to work with is the Rates of Return power which can be a good accumulator of money. The second economic power is Actuarial Science which can be a good distribution power. These powers were always meant to work together in proper balance.

If we don’t incorporate distribution power, then we can be defaulting ourselves to the 3-4% income rate problem. When we incorporate Actuarial Science along the way we put ourselves on a path that can potentially provide higher retirement income rates from the assets we’ve built. The balancing between these economic powers is the key. Having too much of either can make you less efficient. Then the power of actuarial science, through the death benefits and cash values of the whole life insurance or indexed universal life, can interact with the interest rate power of retirement assets to create the ability to take higher retirement income rates safely. One needs to be working towards building the proper balance between these two powers on their way to retirement.

The interaction of these two cornerstones provides both the exchange/trade option which we call the Covered Assets, and the investment option which we call the Volatility Buffer to choose from at the time of retirement. A covered retirement asset is one that is accompanied by an equal amount of whole life insurance death benefit. Similar to how most government entities provide retirement pensions to their employees, covered retirement assets lay the foundation for self-made pensions in retirement. This is accomplished through the interaction of a retirement income tool that is unrelated to the curves of the withdrawal rate simulations called an income annuity, a self-made pension, and your whole life insurance death benefit.

Under this option the interaction of your other retirement assets and cash value life insurance gives you the ability to create a guaranteed retirement paycheck for life historically in the range of 7% to 13% from the assets you’ve built, while at the same time providing perpetuation of retirement income for a spouse and/or a legacy for your heirs.

The key is that this is one continuous journey. With the proper knowledge of income streams, you can pack your bags for this financial hike towards retirement. Don’t worry though, it’s not something that has to be done alone. We have helped more 3000 physicians, 1000 dentists, 3000 successful business owners and 600 independent pharmacy owners create most optimal asset allocation, reduce taxes and almost double their retirement income or distribution rate as well as create various retirement income options for last 20 years. If you like this article then love to help you with your retirement plan. Please call (877) 972-3262 or complete contact us to speak Neil Jesani, CFP.

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