From the time we are just wee tots, most of us were trained to save. When I was in elementary school just a few years back (?) we were encouraged to save by way of a savings account that was set up within the school system. Every week, we took 15 minutes to fill out deposit slip, and we put whatever pennies worth of savings away for our rainy day. Little did I know that it was the beginning of a long process of education that would span my lifetime, and become my occupation and life's work. We were taught to save and accumulate for a later goal, of which at that time I had no idea what a goal was but I was in for the ride.
Later on in life for all of us, we became more educated to save. Savings accounts, IRA’s, 401(k)'s, investing- to accumulate money. The more the merrier. He or she who dies with the most toys wins. Think big or go home... you get the picture. But, nowhere in those crafty ditties did they say WHY we were saving, or for what. Now, as you know, I am all about saving- but with a plan. Saving without a plan is like taking a drive with no destination in mind- how will you know when you get there? "Just accumulate" they say, but why, and to what end? Clearly, we don't know what our standard of living will be, where we will retire to, and how much it will cost decades before the actual event. A fair amount of planning and projecting is at hand, but let's be clear that ultimately in the early parts of our program, in our 30's and 40's at least, we are just taking an educated guess based on our present standard of living, and taking into account inflation, risk and a host of other factors, all we can do is guess. Once we get to our 50's, the kids are hopefully through college, and we can get a better idea and plan accordingly. But, as in the earlier stages, guessing is still a factor in the plan. So, is the ultimate answer just to accumulate all that we can and hope for the best?
As we go through life, we are taught to save, but perhaps for the first time, let me throw a monkey wrench into that thought. You see, when I ask new clients the most important thing they consider to be the biggest risk to them, the usual answer is risk of losing principal. While I see that as a real fear, I challenge that answer: I believe that the biggest risk to be concerned with facing retirement is loss of INCOME, not PRINCIPAL. Why you ask (or let's just assume you were asking)? Because most of us are saving for the biggest event in our lifetime history- retirement. While it may not be as big as getting married or having kids, it is pretty big. And if you don't have sufficient assets to support yourself into this new paradigm in your life, it won't happen- as least not with much financial support. So my friends, income is the name of the game. Consistent, durable, dependable income- income that you can't outlive. Does accumulation of principal guarantee income? Ask those who relied on their portfolio to support them in 2008- with the depletion of principal also goes a reduction in income- there goes that theory. There's got to be a better way...
There are a number of factors that will decrease income in your retirement. Taxes, for one reason. This gives rise to spending time on your retirement planning many years in advance using a variety of vehicles that vary the tax consequences at retirement. The first that comes to mind is the difference between a Traditional IRA and a Roth IRA. With the Traditional, you get the tax deduction in the year of contribution, and with the Roth, you pay the taxes in the year of contribution, but the income derived later is tax free. Thus, with no taxation, there is more left in your pocket at a time that every dollar counts. Thus, if you vary your retirement contributions between before tax and after tax contributions (based on Federal qualifications) the income later on will be varied as well. There are some investment programs that will guarantee you income at retirement regardless of market value, so in the case of another 2008, your income may be virtually unchanged. Now, securities laws prevent me from talking about investment programs specifically, and I have a dear Compliance Officer who reads my column before I go to print, so I am restrained to tell you about them due to securities laws. I suggest you speak with your Financial Professional to learn about planning for the future with INCOME in mind, not just ACCUMULATION. Give us a call and we'll fill you in on the skinny. The time for planning for retirement income is decades before the blessed event. It's time to start preparing now…every year counts!