Transitioning from a saver-in-the-accumulation phase to a spender in the spending-phase of your financial life means not only keeping a close eye on your investments, expenses, and taxes, but also making your own “paycheck.”
For some retirees, that paycheck could come from living off the interest or dividends from investments. Others may prefer more predictable sources of income, including pensions and Social Security. These “safe” assets can help you gain more peace of mind and perhaps cover your basic living expenses.
Backup your savings for emergencies
The key is to systematically address the problem of how best to spend your money in retirement. You should make sure you have enough money to cover unexpected expenses for at least a year. Let’s say you’re worried about having to sell assets in a bear market to cover emergencies. You may wish to speak to your advisor about rebalancing your portfolio, perhaps using more liquid assets.
Include predictable income streams by using annuities and life insurance
Most planners understand, at least at a basic level, the power of annuities to help their clients avoid running out of money in retirement. After all, almost every financial services company offers annuity products, and has for many years. Modern annuity research has produced a multitude of data-based reports that confirm the value of an annuity in an annuity portfolio. Life insurance and annuities may be appropriate for retirees who want protection of their capital, a predictable income stream for a lifetime, options for long-term care, or a legacy to a family member.
Despite the positive data about pensions, many advisors are reluctant to offer them to their clients. This reluctance is often because they believe customers who have heard negative things about the product through the media or online will get backlash.
Many popular financial entertainers like Dave Ramsey have spoken out openly against pensions and continue to spread myths and misconceptions among their viewers.
However, ongoing changes in the structure of retirement savings and the funding of employer plans have led more and more people to delve deeper into secure money and income products to create their retirement plans.
Since 1974, the traditional defined benefit (DB) plan, which provided retirees with benefits based on final salary and years of service, has disappeared from the private sector. In its place is the direct contribution plan, in which the employee and employer regularly pay into accounts in the employee’s name. Direct contribution plans benefit companies by reducing their expenses. But they place the burden of success in retirement squarely on the individual’s shoulders. When you participate in a workplace plan, both the longevity risk and the performance risk have been shifted to you. Standard direct contribution plans do not guarantee that your account will provide lifetime income, and there is always a chance that your account will become empty before your death.
For this reason, most retiree portfolios will benefit from strategically designed insurance and annuity products. Strategically designed life insurance is another way to create more predictable, tax-advantaged revenue streams. Properly structured, life insurance offers more liquidity, use and control over your money than many other assets.
Brad Rhodes is a Lexington-based financial planner. He can be reached at 336-746-4729.
His column is provided by Syndicated Columnists.
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