Suppose you are nearing retirement and are looking for a strategic vision to guide your thinking. Here are six thoughts, Retirement income planning benefits you because problems are hard to solve once they pass the critical threshold.
Here are six things to notice:
- You cannot rationally plan to die broke. Your estate the day after you die is your security the day before. That said, it is reasonable to believe your estate will be the leftovers. You should manage leftovers for you security needs.
- Income and cash flow are not necessarily the same thing. You can only spend cash. Notice the opportunities. Taxes matter. A little insight and foresight can make meaningful differences.
- Your leftover estate will be a function of several factors. Yield on your investments, spending, taxes and inflation. You will tend to get it close if you control spending so that your assets stay about the same. Given yield as a spread of interest over inflation. Anything much beyond inflation plus thee percent is becoming ambitious.
- The plan should address durability. Can it last indefinitely if required? When you were young the biggest financial risk was that you might die too soon. Later. it is the risk that you might live too long.
- The plan will benefit from flexibility. The future will unfold, but you cannot plan for more than tendencies. There are no guarantees. No one knows the future with precision. Flexibility will give you options to use to your advantage.
- Predictability is a value. Even not knowing the future is okay if you can fit your future into a reasonable zone of yield, spending and time. If you assume something reasonable like 5% returns in a 2% inflation world, you could test to see if it works for you with the spending you prefer. It is a fairly simple spreadsheet solution.
Keep in mind that models are never accurate. You are looking for the shape of the problem, not the precise solution. If the model says you will run out of money at 78, you might want to restructure your spending.
So think about the mix of variables then durability, flexibility, and predictability. Approaching the problem from there will give you insight and better yet by tracking it you can see problems beginning before they become critical.
Like always. Plan, use tools for efficiency, then the 3 Rs. Record results, review their meaning and revise as necessary.
Like most financial planning, retirement income planning is little more than organized common sense.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772