By Orlando McCall
Many seniors who contact me about their retirement goals are having trouble creating a sensible financial blueprint to ensure they don’t run out of cash when they no longer work.
Perhaps you’ve experienced this same frustration. You think you are doing everything right, paying off your debts, setting aside emergency funds, and contributing as much as possible to your qualified plans. Yet, you continue to feel stuck and worry that you haven’t saved nearly enough for the day when you want or need to retire.
Why is retirement planning so challenging?
In addition to not having advanced knowledge of how long you’ll live after you retire, there is another, perhaps less apparent, reason that you may find retirement planning so problematic.
Most financial goals for retirees fall into one of two competing categories. The first category is the desire to spend as much as you need to maintain your lifestyle when the paychecks end. I call this the “I’m ready to live a little “objective. By the time you’ve reached this stage of your financial life, you’ve probably been pinching pennies for years, buying generic mayo, shopping at the dollar store, eating bologna sandwiches, cutting coupons, and avoiding the mall.
Intuitively, you know you will need a more significant nest egg than you thought. So, you’ve scrimped, saved, and scrimped some more. You’re tired of it and ready to cut loose in your new world of leisure and decreased responsibilities. This objective is portrayed in the quintessential “older couple walking on the beach holding hands” financial brochures.
While there is nothing wrong with wanting a less stressful and more fulfilling retirement, that particular desire butts heads with the second retirement objective- managing retirement risk and providing for a legacy.
The risk management/legacy objective pressures you to put money aside to meet your risk management goals. Risk mitigation goals typically include things such as providing for unforeseen health issues not covered by Medicare, divorce, separation, widowhood, downward shifts in the economy, inflation, or other life-changing events that happen to us all. Many retirees may also want to create substantial legacies for their loved ones or leave money to a favorite charitable organization.
As you can see, the two objectives involving how you spend your savings versus how you grow it are inherently at odds. It is the friction expressed in a question people getting ready to retire often ask me. “How much money can I comfortably spend without worrying about running out when I need it most?”
Although you cannot ignore these opposing retirement goals, you can reduce the tension. For instance, you might incorporate products and strategies that provide you with slow, steady growth and less exposure to market volatility, such as fixed annuities, bonds, certificates of deposits, or specific types of permanent life insurance. A well-balanced portfolio that uses more conservative types of products can give you some wiggle room if you need higher returns and growth. Carefully calibrating your portfolio in this manner can give you more income when you need it later.
Inflation- The ugly reality
Many people poorly understand inflation’s impact on income and investments. This lack of knowledge is understandable, knowing that we’ve all been conditioned to accept that 2-3% inflation is “normal” and even necessary in an economy. Nevertheless, there is real pain every time inflation begins to rise.
In 2022, Americans noticed the impact of rising inflation on their economic well-being. Many pre-retirees and retirees rightfully concluded that fixing their incomes for 20, 30, or even 40 years at a time of runaway inflation is foolish.
Multiple retirement researchers confirm this belief, including a panel of experts at a recent CNBC Financial Advisor Summit. Financial professionals at the Summit concluded that inflation risk is the most acute for pre-retirees and retirees living on fixed incomes. These seniors, many of whom rely on investment income and Social Security, could have a more challenging time adjusting to higher consumer prices than those continuing to draw paychecks.
Even the well-planned, more affluent seniors face hurdles regarding the erosive effects of inflation. For example, say you have saved enough to create a retirement income stream worth $100,000 when you retire in 20 years. That seems like a decent income, doesn’t it? However, if inflation is only running at 3%, that $100,000 will be worth just $74,000 by the time you retire. If you live to age 80 in retirement, assuming inflation only stays at 3%, your buying power has decreased by a whopping 70%! Social Security Cost of Living Adjustments won’t do much to offset this as they tend to lag the actual inflation rate. For instance, the 2022 COLA was 5.9%, but food, utilities, and transportation prices went up much more than that.
Your retirement income plan must be designed to GROW.
If you want to avoid the implosion of your standard of living, you and your advisor must create a plan to increase your income to pace or outpace inflation. By using a combination of tools and products to help calibrate your retirement income, you can offset inflation’s adverse effects while still allowing a measure of liquidity and control. An array of products exists that is specifically made to give seniors moderate growth with little to no market risk. There are also strategies to help you pay off your debts faster or lower your tax burden. These approaches will result in more money you can use to fund your retirement goals.
I know things are a bit daunting right now regarding the economy. But, there are still ways you can create multiple income streams in retirement without exposing your wealth to unnecessary risk. I’d love to help you explore all your options and give you the information you need to make a decision that feels right to you.
omccall@rcmfinancialllc.com
(404) 905-2180
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