Retirement Prep - Balance Your Economic Strategies
Shelly never realized how simple retirement would be.
“Will I have enough money coming in each month to live like I want to live?” she said. “And will it last as long as I do?”
But really hard.
At first, she thought it would be as simple (and easy) as saving enough into her 401K plan. So, she just maxed out the amount she could withhold from her paycheck each month and put those withholdings into her company’s 401K plan. The company matched her contributions up to a certain amount, and she knew she’d also get some Social Security.
She was all set. Or so she thought.
When she turned 50, Shelly thought it might be a good idea to go see a financial planner to see if there was anything she might be missing. And good thing she did.
The first thing the planner did was forecast how much money Shelly might have in her 401K plan, assuming she remained employed in her current job. While Shelly understood there were no guarantees, the projections seemed both realistic and adequate to Shelly.
“That’s a lot of money!” she smiled. But her planner wasn’t so sanguine.
“Shelly, you do understand you should not take more than about 3% to 3.5% of the account as retirement income each year. After all, you don’t want to run out.”
Run out? She could feel the blood draining from her face.
As a single woman, Shelly had seen her own mother descend into poverty in old age. Her urgency in saving money was largely motivated by that experience. She never wanted to experience anything like that, especially in the most vulnerable time in her life (old age).
The planner explained that due to the unknowns of future fluctuations in the stock and bond markets, even the most carefully designed portfolios could only produce modest income in retirement and have a strong probability of not evaporating.
“But this portfolio I’m showing you has a 90% chance of being successful…”
Shelly imagined getting onto an airplane and having the pilot announce, “Ladies and gentlemen, we’ve got some bumpy weather ahead of us, but I believe we have a “90% chance of getting there safely.”
She decided she’d rather walk.
“What…other choices might I have?” she asked.
Her planner smiled, “I thought you might ask me that.”
“You can actually begin now to utilize the science of actuarial forecasting to guarantee that your income will never fluctuate and that it will last as long as you will.”
Shelly had no idea what the science of actuarial forecasting was, but she understood what “guaranteed” meant. She proceeded to ask more questions.
Her planner explained that during her pre-retirement years, accumulating as large a pool of assets was the top priority. So, good for her that she was majoring in 401K contributions.
At the same time, she should be on a dual, complementary track to shift her “life expectancy risk” to an insurance company. Depending on one’s age, this may be done with a life insurance policy, a guaranteed income annuity or a combination of both.
By balancing her pre-retirement strategies between asset accumulation (her 401K plan) and actuarial risk-shifting (her insurance company), Shelly could get back to her original conception of retirement.
Simple. Not hard.
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