What is it?
Retirement Income Planning is a niche in the financial services industry that is still in its infancy. Why? Well, frankly in the previous generation, it wasn’t that important. Compared to today’s baby boomers, a much higher percentage of retirees in previous generations had pensions. These pensions are built to give lifetime income to both the retired employee as well as some remaining income for the spouse.
Interest rates were higher in years past which also helped previous retirees in many ways. They had an increase every year in their Social Security income, sometimes as high as double-digit increases back in the early 80’s; contrast that to today’s retirees where there has been no increase in three of the last seven years. Also, safe investments yielded a much higher return. In the early 90s, retirees could simply put all of their retirement assets like their IRA into CDs and earn a guaranteed 7%-8%. By doing this, they could simply live off of their interest from their investments, leaving their principal alone for emergencies and as a legacy to their loved ones.
One last thing to consider is that people are living longer today. So not only were yesterday’s retirees in a sweeter financial position, but also the timeframe they needed their monies to last for was a few years shorter.
Why is it Necessary?
Fast forward to today, where interest rates are lowest they’ve ever been. Fewer and fewer retirees are getting pensions. Employers have shifted the responsibility of investing for retirement onto employees by taking away defined benefit plans (pensions) and replacing them with defined contribution plans (401k, 403b, for example). And although some companies still match contributions, that employee is still responsible for choosing what investments they fund and how much gets allocated into each one. Ultimately those employees retire with the largest amount of money they've had at any point in their life, and are now responsible for answering questions like: “how much can I safely withdraw each year without risking running out?” and “what types of safe investments should I have my money in that can still grow over time?”. Now add into the mix the possibility of a serious stock market correction at any time, and the need of having retirement funds last for many years because of baby boomers’ increased longevity, and retirement planning seems like a daunting task.
This is specifically where the need arose for retirement income planning. Retirement income planning is built around the concept of turning your nest egg into a predictable income stream over the entire course of your retirement. Most people spend their working years accommodating their spending patterns and lifestyle to fit within a predictable salary, or salaries in the case of multiple income households. They know what’s coming in, so they know how to adjust for what’s going out. Proper retirement income planning shows you how to take your IRA, 401k, brokerage accounts, Social Security incomes, etc., and give you a target annual “salary” throughout retirement.
The biggest value of having an income plan is actually having a plan built for where you want to go. I use the analogy of flying from New York to Los Angeles. For this journey, the pilot has a flight plan. He or she has a heading and a course. Pilots have an expected time of arrival, and expected speed of travel. They know how much fuel they need. Throughout the journey those in the cockpit are making adjustments to account for issues like turbulence, bad weather, other planes, etc. But what if that pilot just decided to take off and head west and then either turn left or right when they hit the Pacific? That plane very often would not reach its destination.
Who Can Help Me With This?
Because I recognized this need, I completed the Retirement Income Certified Professional (RICP ®) designation. This designation was put together to teach financial professionals the most current and effective ways to generate safe, reliable income for retirees in this low-interest rate environment. Many advisors out there are simply not equipped to handle the transition for their clients from their working years to their golden years. Investment strategies that were appropriate in a client’s working and saving years (called the accumulation phase) are completely different than appropriate strategies for that same client in retirement where they need to spend from their assets (called the decumulation phase). And not only are many of those strategies sub-optimal, but they also can be downright dangerous because they can expose the upcoming or recent retiree to a multitude of new risks that retirement introduces. Listen, if you get diagnosed with heart disease or prostate cancer, you’re not going to go to a pediatrician for treatment, are you? It’s best to stick to a specialist who is specifically trained in treating your age-appropriate situation.
To learn more, click on Planning Process to learn the steps involved in creating a customized plan for you, or contact me to set up an initial consultation.