I’m pretty sure National Lampoon’s 1985 movie “European Vacation” was based on my family’s 1972 trip to the same destination.
Both were comedies.
Back then, European borders and currencies were as numerous and confusing as a Byzantine map.
To this day, I have no idea where we were when I tried to mail that postcard.
I dug into my pocket and plunked down what might as well have been Monopoly money to buy a stamp. The postmaster, a man with shaggy gray hair and a walrus mustache, frowned at me over his glasses and punched my money with his cigarette-stained fingers, as if he were stamping it “rejected!”. In very broken English he said, “Here!” thumping the money… “is not here!” pointing at his feet.
It took me a few minutes to figure out that he was saying, “Your money is no good here.” I was trying to use Swiss francs in Germany. And in 1972, that was still a no no.
I was using the wrong kind of money for my current situation.
That’s a mistake I see many retirees making. They are using the wrong kind of money for the situation they’re in.
Many retirees are saving only one kind of money, mistakenly thinking they can spend it in the very different situation they will find themselves once retired.
Last week, I identified four different “buckets of money” a retiree will need in retirement. This week, let’s shift the metaphor from buckets to currency. And the lesson to learn is that you need the right currency for the situation in which you find yourself.
Most retirees I meet are concerned about four things: lifestyle, longevity, liquidity and legacy. Said another way, they want enough income, they want it to last as long as they do, they want some extra money on the side to cover the unexpected and they want to leave something to those they love.
One lesson that German postmaster (he really did look a lot like Albert Einstein) taught me was that different situations call for different kinds of money. And unlike most international travel these days, you cannot wait until you get to the new country to exchange your currency.
Pre-retirees have to plan ahead to have the right kinds of “currency” to do what wish to do.
There are three distinctly different “economic powers” serving our economy: banking, insurance and investments. Each is important, irreplaceable and definitely not interchangeable.
Banks offer safety of and access to your money.
Insurance companies pool risks faced by people and offer timing – money when you need it.
Investment companies offer growth through participation with the greatest operators in business around the world. No guarantees, but a great track record.
If a pre-retiree only focuses on “now,” and ignores the “one day” of retirement, he or she will most likely save money into a bank account (for perceived safety) or into an investment (for anticipated growth). They may have little if any money in the insurance category. This is common but unfortunate.
With interest rates historically low and the stock markets as volatile as ever, the amount of income a retiree is able to safely take from their investment portfolio may be smaller than they’d anticipated (many of my colleagues recommend a withdrawal rate of less than 3%). And if the newly-retired person experiences a significant market loss in the early years of their retirement, the problem is accelerated…they may run out of money quicker.
Only an insurance company can pool the timing risk faced by a retiree and promise to pay a (typically) larger income to both spouses, guaranteed for life. In this case, both lifestyle and longevity concerns are addressed.
As in most things economic, it’s a trade-off. Money given to an insurance company to guarantee income usually doesn’t grow.
Too often I see debates over which is “better:” banking, insurance or investments. The answer is clear – none of the above. None of them need to be proven “better.” What is needed is balance.
And balance comes as the natural result of a plan – your personalized retirement plan.
To help you get started with your own personalized retirement plan, I’ve created a comprehensive checklist of pre-retirement questions for people who are 60-something. It’s free if you’d like a copy. Just email me at bmoore@argentadvisors.com, and I’ll send it to you right away.
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