Protect Your Retirement Income

 In this Segment, Michael Reese introduces a special guest, Ms. Elizabeth James, who has been an advisor at the firm for 19 years.

 

Mike:

Today we are going to focus on some of the biggest mistakes that we’ve seen over the years. I’ve been doing this for 25+ years, and Elizabeth has been doing it for almost 20. When you think about people with their retirement planning, what is the number one mistake that you see people make?

 

Elizabeth:

Hands down, it is absolutely that people fail to protect their income.

 

Mike:

If you think about it, when you’re working, you get a paycheck. But what happens when you retire? Do you get a paycheck anymore?

 

Elizabeth:

Absolutely not. You need an income plan. Retirement is all about income. I have a saying I like to use. We all know the three most important things about real estate: location, location, location. When you think about retirement there are three different things that are important: income, income, income. It’s not just about how much you  save but considering how much income you’ll have to spend and more importantly how long it’s going to last.

 

Mike:

You have to make it last and grow with inflation. Many people don’t protect their income, but what does it mean to protect your income? Do you have a client story to help our readers understand this concept a little bit more?

 

Elizabeth:

I have several new clients that come right to mind, but I’ll pick one specific couple. This couple had just retired and had done a great job saving. Their original income plan was to take a percentage withdrawal rate off their portfolio. That was their broker’s advice.

 

Mike:

What does it mean when you say they were going to take a percentage withdrawal?

 

Elizabeth:

A typical default strategy might be to take 4% of your savings as your withdrawal rate. For example, if I retire with a million dollars and take 4% of that, it would be $40,000 a year.

 

Mike:

This couple’s broker told them they would be fine if they took 4% from the money they had. Is this a good strategy?

 

Elizabeth:

That’s what they were told, but there are so many other things to consider. What about different types of accounts? What type of account makes the most sense for your income plan and strategy? What about Social Security? What about other income sources in retirement? You need to have an income plan. When you’re working and saving, you have a contribution plan and a savings plan. It may be a 401k, an IRA, or a Roth IRA, but you have some type of systematic contribution plan. You need an income and distribution plan.

 

Mike:

It seems like common sense, but many people don’t do that, and most financial advisors aren’t aware of this. They’ve been trained to help you grow and accumulate your money, but what happens when you get to the stage of retirement where it’s no longer about growth and accumulation? At that stage, it’s about preserving what you’ve worked so hard to build, making it last, and taking that income stream. Let’s go back to this couple. If they had a million dollars and they followed the broker’s advice and started taking 40,000 a year, what’s wrong with that?

 

Elizabeth:

The current market is a great example; it doesn’t always cooperate.

 

Mike:

They call it the 4% rule that you’re outlining here. If you follow that advice, different studies say that if you have just one year out of the first 10 years of retirement where the market loses 20%, the odds are overwhelming that you’re going to run out of money. You’re up a creek without a paddle. When people set up their retirement savings in a diversified way and pull out 4% a year, they’re leaving themselves exposed to market risk. What’s a better way to protect the income?

 

Elizabeth:

A better way would be to give specific jobs to different parts of your portfolio. It’s all about purpose, and what you need those resources to do for you. Because we need to replace a paycheck in retirement, we need to give the job of income to some part of our retirement savings.

 

Mike:

In our example of a million dollars, you would carve out a portion, and its job would be to deliver consistent income for some period of time, whether it’s 10 years or for life.

 

Elizabeth:

It’s different for everybody depending on their situation. Our happiest clients are those who have protected income sources. Their income comes in consistently, regardless of what’s happening in the market, the news, TV, or anything else that could derail your market portfolio.

 

Mike:

Should we wait till retirement to do this or start setting up before retirement?

 

Elizabeth:

This is something you need to set up before retirement. The closer you get to retirement the riskier it is because anything could happen to the resources in your portfolio.

 

Mike:

You don’t know what the market is going to do. When is a good timeframe to start thinking about this?

 

Elizabeth:

We certainly help clients that are 5-10 years out from retirement, but it’s different for everybody. If you’re within 10 years of retirement, you need to get an assessment. Look at where you are today and have a plan so that you know how you’re going to transition to retirement income when the time comes.

 

Mike:

If you’re like the person Elizabeth is talking about, and you’re growing your money but have no idea how to protect your income in retirement, give us a call. We would love to put together a personalized Retire Right Report for you, free of charge, to help you intelligently carve out a portion of your portfolio so you can protect your income when the time comes.

 

 

 

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