Have you done your homework?
I have met with many folks who have some general idea of how much money they'll have in retirement. One of my roles as a planner is to try to determine exactly where your income will be coming from, and in what amounts. Wouldn't you like to know these things before you retire?
For some reason the Wall Street system has educated consumers on the idea that you should have everything in the stock market, leave it there forever, and assume you'll draw some magical percentage (such as 4%) for the rest of your life. Hopefully you'll be alright.
That plan scares me to death!
Let's take an example. Suppose you had accumulated $1 million dollars by the summer of 2007. Your plans were to retire at the end of August. Taking 4% would give you an annual income of $40,000 a year, which is fine with you, and you call it quits on schedule.
By the fall of 2009 you would have been in a panic situation. The value of the S&P 500 declined by more than 50% over that time period. Now your million dollar portfolio is worh only $475,000. In order to keep taking a $40,000 a year distribution you'll now need to take nearly 8.5%! At this rate of drawdown your nest egg is not long for this world. Of course, the market came back, but on average it took 5 years to do it. Are you going to have to take a job at Wendys?
Instead, you should analyze all of your sources of potential retirement income, look at alternatives, tax scenarios, etc. and not put all of your eggs in one basket.
Is there a better way?
If I told you about a way to earn 8-10% for the next 15 years, along with an 8% bonus on rollover, coupled with a guaranteed income for life that has no market risk would you be interested in hearing about it?
It sounds too good to be true, right?
It's not. The insurance companies have responded to the Wall Street follies with a very attractive low-risk solution. This can be done through the use of fixed-indexed annuities coupled with a guaranteed income rider.
These riders give the client a great way to make sure their income never goes away. My favorite thing to do is to duplicate the income that you had during your working years, using these low-risk products, and then using additional assets for investment growth, while maximizing your tax options. Then you have the best of both worlds.
What about your other sources of income?
- Social Security
- Company retirement plans
All of the above should be calculated and factored into the financial plan. Then the tax consequences need to be looked at, and balanced against your lifetime goals and legacy desires. Only then is your financial plan complete.
Is you financial advisor doing this for you?
Or is his every answer a mutual fund?
In these volatile times you need to be aware that the stock market is only one piece of a well-crafted solution. After retirement you'll care more about paying your bills than how much growth your portfolio received.
Till next time,
The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general.