Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®
The following is an excerpt that describes some of the risks to retirement income planning.
“That’s a great analogy, Uncle Wayne. I can see how it’s important to make sure you have a great plan as you transition to retirement, but what are some of the key risks to retirement income planning that are different than saving for retirement?” Mark asked.
Risks to Retirement Income Planning
“Good question, Mark. A key risk is that you really don’t know how long you must plan for, which is called longevity risk. People are living longer today and don’t want to out-live their investments.” Uncle Wayne explained.
“I was reading some stats the other day, and for a couple today who at age sixty-five, there’s a 50% chance one will live to ninety and a 25% chance that one will live to ninety-five,” I added.
“Wow,” Sally said. “Mark, if you ever get a new girlfriend, you’ll have to plan for another thirty-three years!”
“Good luck with that,” Alice commented with a smirk on her face.
“Let’s get back on track. We’ve already reviewed inflation risk and taxation risk over time (see here), so another key risk we must review is something called the sequence of return risk,” Uncle Wayne said.
“What in the world does that mean?” Sandra asked.
“I’ve been doing some reading, and I believe it means that in retirement or just prior to retirement, if you have poor investment returns, it can dramatically reduce your long-term income,” Mark suggested.
Uncle Wayne continued. “You are correct, but I want to add to that. When saving for retirement, if you average 4.90% with a moderate portfolio over ten years, we know that you don’t actually have a return of 4.90% every single year. You could have years when you get higher than 4.90% and years when the returns could be negative. When saving for retirement, you can take advantage of down years by adding more money to your savings. The challenge is that once you stop working and you’re taking money out of your investments every year, if you have bad early years in retirement, it can reduce your investment account balance, and you don’t have time to make it up. As a result, your retirement income can be determined by luck, which can be either good or bad, depending on when you start withdrawals.”
“Ouch,” commented Alice. “So that means two people could have the exact same investments and retire seven to eight years apart and have completely different experiences and retirement incomes. Are there any other risks we need to review?”
“Yes, there are few. One is cognitive risk, which means as people age, they may not be able to make financial and health decisions for themselves. We’ll review powers of attorney in a later session. Another risk that I worry about for myself is health risk, which refers to staying healthy as I get older, and the real worry that one day I may have to move into a retirement home and then perhaps a long-term care facility,” Uncle Wayne suggested.
“You still look pretty healthy to us,” Sally added. “I bet you can still water ski better than Mark!”
“I’m sure he can,” Mark added. “You’ve been retired for a while. How much income do we actually need in retirement, Uncle Wayne?”
For more information on retirement income and cash-flow planning, you can refer to Chapter 3: Protecting and Preserving Your Wealth, from the book Preserving Wealth The Next Generation – The Definitive Guide to Protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
For your FREE Copy of Preserving Wealth, CLICK HERE
For your free retirement review, CLICK HERE
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
Insurance products are services provided through Assante Estate and Insurance Services Inc.
