Scott Peterson was a guest writer on the popular White Coat Investor blog—a blog esteemed amongst physicians and other high-income professionals. Scott’s blog outlines our proprietary process for investing, The Perennial Income Model™. The article also presents a retirement income plan creation example of a couple who have accumulated $1 million for their retirement.
Click here to read Scott’s blog in its entirety on WhiteCoatInvestor.com.
After my last blog, where I described the reasons we are experiencing high inflation this year, you might be asking “What can I do to combat inflation in my own life?” As I consulted with my team members, financial professionals that work with retirees all day every day, we came up with twenty-six inflation-fighting ideas that will help the retiree, or those nearing retirement. Some of these ideas will have a huge impact, other ideas are less significant but are things that you may not have thought of previously.
I found it interesting that as we compiled our list, it morphed from being merely an inflation-fighting list into a commonsense checklist of things that every retiree should consider going through as a matter of just being financially responsible. Obviously, not every one of the money-saving ideas on our list will apply to your specific situation, but some will. We are confident that every one of you will benefit from going through this list in your own situation and that you will end up saving money by implementing the applicable ideas. These savings will be helpful for you to maintain your lifestyle as you are squeezed by inflation.
Investment mistakes early in retirement can be devastating and there are no do-overs. So, I first wanted to remind you of the inflation-fighting capabilities of your investments before we talk about any other inflation-fighting/money-saving ideas.
1. Remember, the price we pay for inflation-beating investments is having to endure temporary periods of volatility. Volatility is not risk, the synonym for volatility is unpredictability and in the short-term, equities are certainly unpredictable. You wouldn’t be human if this year’s stock market hasn’t caused you concern. However, you need to stay the course and not let yourself be frightened out of owning a piece of some of the most profitable corporations the world has ever known. Compound interest has helped you accumulate the nest egg that you now have. Keep the miracle of compound interest alive during retirement by owning equities. Hold on to your equities if keeping up with inflation is your objective.
2. Have a plan. We follow our proprietary Perennial Income Model™ to create an income plan that protects our retirees’ short-term income from stock market downturns while protecting their long-term income from the ravages of inflation. The Perennial Income Model helps to strike the right balance between owning less-volatile types of investments and owning the more-volatile inflation-fighting equities in a portfolio. It matches your current investment allocation with your future income needs. Do yourself a favor and learn how the Perennial Income Model can help you create your retirement income plan. To learn more about the Perennial Income Model, order a free copy of my book, Plan on Living, here.
3. Have faith in the future and follow your plan. We are not facing an investment apocalypse. Market conditions are cyclical, and we will continue to experience good as well as bad economic cycles. A well-thought-out investment and retirement income plan should have built within itself a contingency plan to deal with economic downturns and periods of market turbulence. In fact, your plan should not just help you to navigate volatile markets it should assist you in taking advantage of them. Don’t allow yourself to get derailed from your plan.
4. If you haven’t started Social Security yet, consider delaying applying for your own benefit until age 70. Beyond the built-in annual cost of living adjustments of Social Security, your benefit will increase by 8% each year that you delay from your full retirement age until age 70 by simply waiting. Your full retirement age is somewhere between age 66 to 67 depending on your year of birth. Receiving 24%-32% more each month in Social Security benefits for the rest of your life can be a handsome inflation-fighting boost.
5. Go back to work. Statistics show that almost half of all retirees go back to work after two or three years of retirement and they go back to work for reasons beyond satisfying income needs. In other words, they get bored. Work satisfies their need for social interaction and the need to be part of something bigger than themselves. Find a part-time job that is interesting to you for a day or two a week. With a nationwide worker shortage, there are endless opportunities for retirees to find the kind of job they would enjoy with the flexible schedule that they desire. Being engaged in something that interests you, while picking up a couple of bucks to help with inflation can be realized…have fun!
6. Replace light bulbs and fixtures with LED. LED bulbs last longer and use 25% less electricity than outdated light bulbs that you still might be using in your home.
7. If you are regularly away from your house during the day, program your thermostat. Don’t heat or cool an empty house. You can drop your electric and gas bills by as much as 10% by adjusting your home temperature by a few degrees. Open a window in the summer or wear a sweater in the winter to offset the mild changes in temperature.
8. Take advantage of the energy-saving programs offered by your power and gas companies. Utility companies provide valuable energy-saving tips and even will send representatives to your home to help you recognize where you could substantially save on your energy bill. They will also keep you up to date with rebates and tax credits that are available to you as you update your home. This service is free or available at minimal costs.
9. Save gas by better organizing your errands. Knock out all your errands in one trip versus three or four separate trips.
10. Don’t run your appliances until they are full, specifically your washer, dryer, and dishwasher.
11. Don’t be shy about asking for senior discounts. We found a website, www. seniorliving.org, that keeps a list of discounts available to seniors or those approaching retirement. It provides dozens of discounts and covers everything from grocery shopping to cruises. We found that many of these discounts are not well known, nor are they advertised by the companies offering the discounts. You will have to know about these discounts in advance and you will have to specifically ask for many of these discounts.
12. Life has become so much easier since we have evolved into online shoppers. Online shopping has also made it easy to comparison shop and find the best deals. Take a couple of extra minutes to compare items as you make your online purchases. We found two websites, Honey and RetailMeNot, that assist you in online shopping. Both websites show you some of the best available coupons on the internet to help you get the best deal possible.
13. Shop your pantry or freezer first. How many times have you run to the grocery store to buy an item, only to later find that same item sitting on a shelf or in your freezer at home. All of us are guilty of wasting food and money as we throw out food that has exceeded its expiration date. According to Feeding America, “Each year, 108 billion tons of food is wasted in the United States. That equates to 130 billion meals and more than $408 billion in food thrown away annually. Shockingly, nearly 40% of all food in America is wasted.” The key to avoiding waste is to take the time to better organize your pantry and food storage.
14. Try using store brands over name brands.
15. Barter – I’m not suggesting that you haggle over everything but, look for opportunities to get a better deal. You will be shocked at the discounts you will receive as you ask one simple question as you book hotel rooms, rent cars, and hire services. Try asking, “is that the best you can do?” That question has saved me thousands of dollars over my lifetime.
16. Audit your own credit card statement. Are there subscriptions that you can eliminate that you no longer use? Gym memberships, multiple streaming services that you don’t use, and magazines that are never read are the most likely culprits.
17. Make an extra effort to pay off debt, especially adjustable-rate loans. Specifically, be mindful to not carry a balance on your credit cards month to month.
18. Consider a lower-cost cellphone plan. With WIFI being so prevalent, maybe that unlimited data plan might not be necessary.
19. Load up on nonperishable items when they go on sale.
20. Work off a budget. It may have been years since you followed a budget but following a budget can be useful to help limit impulse purchases.
21. Do your kids a favor and sell the stuff you don’t use anymore. All who have had to clean out a deceased parents’ home know what I’m talking about. Learn how to sell your unwanted items on eBay, Craigslist, Facebook Marketplace, and more. You will be shocked what people will buy, and who knows, that collectors’ edition Barbie doll that has been hiding in your basement for decades might be worth thousands.
22. Be strategic as you consider making major purchases such as houses. Interest rates will have to rise to cool down the economy. As rates rise, people will be forced out of the housing market and house prices will drop. Be patient and thoughtful as you consider your next big purchase.
23. Investigate cash back rewards and frequent flier discounts offered by your credit cards and learn to use them.
24. Consider vacationing closer to home during inflationary times. People come from all over the world to visit the national parks and vacation destinations that are often within driving distance of our homes. Make a bucket list of regional getaways that you would like to see. Your next “thrifty” vacation may end up being one of your most enjoyable.
25. Shop for lower auto and car insurance rates. It’s amazing the money that you will save as you shop around. You may also consider raising your deductibles for additional savings. As long as you are talking to your insurance agent, check out how much your house is insured for. The recent inflation has raised the value of your home. Is your home adequately insured?
26. Don’t lapse or cancel that old life insurance policy that you no longer need…sell it. There are viatical companies that will sometimes pay top dollar for life insurance policies that no longer fit your needs. You get paid for your policy and you free yourself from having to pay future insurance premiums.
Before I end, I want to mention some developments regarding inflation that have occurred since our last blog was published. Last week our elected officials announced a student loan forgiveness program that promised to forgive the loan obligation for billions of dollars’ worth of loans. Essentially, the government will be going further in debt to pump billions of dollars into an already overheated economy. During the same week, Jerome Powell, the Federal Reserve Chairman announced a plan to aggressively raise interest rates to quell inflation.
So, our politicians are stepping on the gas pedal while the Federal Reserve is stomping on the brakes. I wish to point this out to you to help you understand that until policies in Washington D.C. are changed, higher inflation rates will be with us. So, in the short term, we are going to have to learn how to live with higher inflation rates than what we have been accustomed to. I hope the ideas I shared with you will offer a little relief.
Hang in there, this too shall pass!
If you have questions, or concerns, or would like to review your personal retirement situation, please click here to schedule a complimentary consultation. You can also click here to learn more about the Perennial Income Model mentioned above in the second fighting inflation idea.
The Perennial Income Model™ was created and launched in 2007. Through all the ups and downs of the stock market, it has withstood the test of time. The initial goal of the model was to provide a logical format for investing and for generating inflation-adjusted income from investments during retirement. In the beginning, we did not fully anticipate all the accompanying benefits that would result from projecting a retiree’s income over such a long timeframe. However, our eyes have been opened to a number of benefits, one of them being how the Perennial Income Model acts as a ‘bad luck insurance policy’.
The Perennial Income Model can protect you if you are unlucky and happen to retire about the same time as a stock market crash. Every stock market correction is temporary, but that knowledge isn’t helpful if you are ill-prepared and are having to liquidate equities in down markets to support yourself.
Let me share with you an example, Mike had been carefully planning for his retirement for years and it was finally his turn. He wanted to be conservative as he selected investments for his retirement years, but he knew enough about investing to realize that a good part of his investment portfolio had to be invested into equities if he was going to keep ahead of inflation.
So, he reluctantly invested more than half of his portfolio in stock-related investments. Mike retired, and almost immediately his worst fears were realized, as the stock market dropped by 50%. His money was invested in a balanced mutual fund that was composed of 60% stock and 40% bonds. Unlike the working years, Mike couldn’t just wait for the stock market to recover, he had to withdraw a portion of his money every month from his mutual fund just to pay the bills. As Mike withdrew his monthly stipend, he realized that he was liquidating a proportional amount of stocks and bonds each month from his balanced mutual fund. This meant, he was systematically selling stocks at a loss every month that the stock market was down, and it could take months, or even a couple of years before the stock market recovered.
Mike was frustrated, and even a little angry. He thought to himself, “why did this happen to me? I anticipated, and planned for, every contingency of my retirement in detail, then the one thing that I have no control over trips me up. I must be the unluckiest person on the planet!”
Mike is not alone; this exact scenario happens and will continue to happen to millions of new retirees every time there is a market correction. It’s true when we are no longer contributing and we begin taking withdrawals from our accounts, the temporary ups and downs of the market can have a much bigger impact on our investments than when we were working and had time to wait out market corrections.
To be clear, Mike’s mistake wasn’t in being too aggressively invested because a 60% stock, 40% bond portfolio is a very reasonable allocation for a new retiree. His mistake was failing to have a plan that allowed him to only liquidate the least impacted, non-stock portion of his portfolio to provide immediate income during a market downturn.
To illustrate this point, let’s take the example of two investors, Mr. Green and Mr. Red. Both have decided to retire at age 65 and both have saved up a $1,000,000 nest egg. Each of them plan to withdraw 5% of their initial balance each year to have an annual income of $50,000. As you can see from the table, both average the same 6% return during their 25-year retirements, but Mr. Green ends up with more than $2,500,000 to pass on to his heirs at death, while Mr. Red runs out of money halfway through his retirement. How can this be?
Every aspect of their retirement experience is identical except for one thing: the sequence of their investment returns.
As you can see from the chart, Mr. Green experiences overall positive returns at the beginning of his retirement and a string of negative returns towards the end. Mr. Red experiences the same returns only in reverse. He goes through a series of negative returns at the beginning of retirement and the more positive returns come at the end. Again, both investors average the same 6% return over their 25 years of retirement. The sequence of those returns is the only difference. We can see from the table just how much of a difference the order of returns makes.
The good news is that it’s possible to set ourselves up to be successful no matter what the markets happen to do year by year. The Perennial Income Model is the bad luck insurance policy that can protect you from the pitfalls that Mr. Red experienced.
I’m not suggesting that following the Perennial Income Model will guarantee that your account balance will never go down, or suffer temporarily because it will. What I am saying is, that by following the Perennial Income Model, you shouldn’t find yourself having to sell stocks at a loss during a stock market correction.
Mr. Red’s losses are realized as he liquidates equities in down years at a loss to cover his expenses. If Mr. Red were to have his portfolio organized according to the investment regimen provided by the Perennial Income Model, he would not be in a position where he would have to liquidate stocks in down years to provide income. He would have a buffer of conservative investments to draw income from while giving the more aggressive part of his portfolio a chance to rebound when the stock market temporarily experiences periods of turbulence.
The Perennial Income Model’s design is intended to give immediate income from safe, low-volatility types of investments. At the same time, it furnishes you with long-term, inflation-fighting equities in your portfolio, equities that won’t be called upon to provide income for years down the road. Market corrections typically last for months, not years. So, even if you are the unluckiest person on the planet and your retirement coincides with a market crash, your long-term retirement plans won’t be derailed as long as you are following the investment guidelines found within the Perennial Income Model.
Ready to talk? Schedule your complimentary consultation here.
Creating a retirement plan can be a daunting task. At Peterson Wealth Advisors, we use our propriety process, the Perennial Income Model™, which outlines three ‘building blocks’ to a retirement plan. Whether you use the Perennial Income Model or another type of retirement plan, these building blocks will make sure you are on the right track to a successful retirement.
The three building blocks to a retirement plan are income and investments, taxes, and legacy. If your plan is built on these three blocks you should have the necessary information to answer the following crucial questions retirement planning questions.
1. Do I have enough money to satisfy my income needs in retirement?
2. How do I invest my money to ensure this income lasts throughout retirement?
3. What can I do to protect my income from taxes?
4. How can I make sure my money goes to who I want it to go to when I want it to go to them?
If your retirement plan doesn’t give you the necessary information to answer those four questions, then it’s a poor plan and you should find something better. If it does, then you’re on the right track.
The income and investment block is the foundation to a retirement plan. Income and investments go hand in hand because how much income you can expect to have in retirement is determined in large part on how you invest your money.
The income portion of the block is where your different sources of retirement income – investments, social security, pensions, rentals, etc. – are gathered to create a consistent single stream of income throughout your retirement. To maximize your income, you must look at each source in the context of your entire plan, not in a vacuum. For example, the goal is not to maximize your Social Security income, but the goal is to maximize your retirement income.
The investment portion of the block determines how to invest your money while balancing risk and return. The money you need to live off in the early years of retirement needs to be invested conservatively to limit volatility, where the money you don’t need for decades needs to be invested aggressively to keep pace with inflation.
The Perennial Income Model achieves both these objectives, letting you know how much income you can expect to have in retirement and how to invest your money to ensure your income lasts throughout retirement. It’s up to you to determine if this amount of income will satisfy your income needs in retirement.
The goal of tax planning is to pay the least amount of income tax, not just in the first year of retirement but throughout all of retirement. Knowing what your income will be over the next 30 years allows you to build a long-term tax plan. This is exactly what the Perennial Income Model does, allowing you to build an efficient tax plan throughout your retirement.
The different tax strategies that can be used are beyond the scope of this post, you can learn more about them here, but they include using tax-efficient investment funds, minimizing Required Minimum Distributions, utilizing Roth conversion, and charitable giving strategies.
Once your income is secure throughout retirement you move on to the Legacy building block.
The goal of the Legacy building block is to effectively and efficiently transfer your assets to who you want them to go to when you die.
Knowing how much you will have at the end of your retirement plan gives you the insight needed to make those decisions and to know if you should be concerned about estate taxes. People typically fall into one of three groups:
The different estate tax strategies that can be used are more than can be covered here but they include creating a gifting plan, knowing which accounts should be donated to charity, and moving money out of your estate to avoid estate taxes.
The Perennial Income Model lets you know how much you will have at the end of your plan, giving you the necessary insight into how much you’d like your heirs to have and when they receive their money. It also allows you to know if you need an estate tax plan.
When presented with a retirement plan, whether it be by Peterson Wealth Advisors or someone else, you need to first ask yourself “will the income from this plan be enough for my retirement needs?” If the answer is yes, then ask your advisor these three crucial follow-up questions to make sure your retirement plan will succeed:
The Perennial Income Model is based upon the three building blocks of a retirement plan – income and investments, taxes, and legacy – giving you the necessary information to answer these retirement questions.
Ready to discuss your retirement plan? Schedule a complimentary consultation.
A fiduciary is a person or organization that acts on behalf of another person or persons, putting their client’s interest above their own in all instances. Being a fiduciary requires being bound, both legally and ethically, to act in their client’s best interest. In essence, they are the guardians of their client’s money.
Commissioned salespeople are not considered fiduciaries because they are representing a product or a company, not the individual to whom they are selling a product, and they are not bound by the higher ethical standard of a fiduciary. Commission salespeople follow a different suitability standard in which the transaction must be suitable for a client, not necessarily the best solution. The commissions they earn can create a huge conflict of interest which effectively eliminates them from the fiduciary standard.
All too often, individuals trust advisors that promote themselves as fiduciaries, only to get talked into buying high-commission/high-fee annuities or real estate investment trusts by these same advisors as these advisors fail to live up to fiduciary standards. Sadly, many investors fall prey to the unethical, yet legal, practices of financial advisors who promote themselves as trusted fiduciaries as a door opener to selling expensive, inappropriate, big commission products to the unsuspecting public.
Unfortunately, some investment advisors are allowed to wear multiple hats at the same time, which allows them to be fiduciaries for a part of a client’s money that they manage, and a commissioned salesperson for the balance of the client’s money. It is not right, it makes no sense, but that is how it works.
The Securities and Exchange Commission (SEC) typically oversees the activities of the fee-based fiduciary while another regulator, the Financial Industry Regulatory Authority (FINRA) oversees the activities of the broker-dealers who are typically those persons and firms that are commissioned salespeople. Additionally, the State Insurance Commissioners oversee the sale of commission-paying insurance products such as annuities within their respective states.
The problem lies in the fact that the SEC is only interested in the activities of the advisors relating to the advisor’s roles as fiduciaries and does not pay any attention to the non-fiduciary sales activities that are being carried out by the advisors.
So, the sale of commissioned securities and insurance products by a fiduciary is not their concern as they view these activities outside of the scope of their jurisdiction. The deception takes place when advisors advertise themselves as fiduciaries, draw clients into their offices, then act as fiduciaries for a small amount of the client’s assets (10%) and then proceed to sell the client big commission products that are not in the best interest of their clients with the rest (90%) of the client’s money.
As I listen to the radio and see advertisements online, it is usually these bait and switch types of advisors that are promoting themselves as fiduciaries. Buyer beware, you need to do your homework.
1. Check out the firms Form ADV and CRS. Form ADV and CRS are the uniform documents filed by investment advisors to register with the SEC. They will let you know how a firm is compensated and will identify conflicts of interest such as receiving commissions in the sale of investments and/or insurance products. You can find a firm’s Form ADV and CRS on the SEC website. If the firm, or advisor you are investigating, earns a commission by the selling of an investment or insurance product then I would suggest avoiding that advisor. They may be “fee-based” which means they act as a fiduciary for some of the client’s money they manage but in the end, they are commissioned salespeople.
2. Know that any product that has a surrender charge, or limits your access to your own money, pays a commission to a salesperson. When an insurance agent sells an annuity, they get paid an upfront commission typically of 6-7%. So, if the agent talks somebody into investing $100,000 in an annuity, the insurance company pays the agent a 6% commission or $6,000. So how does the insurance company protect themselves from losing money on this transaction? Insurance companies place a surrender charge on the annuity that keeps the purchaser from liquidating the annuity for a specified number of years, or at a large cost if the annuity is surrendered prior to when the stated surrender charge expires. This allows the insurance company to recoup the upfront $6,000 commission they paid by collecting large management fees for a number of years or the investor reimburses the insurance company in the form of a surrender charge if they surrender the product early. You are unlikely to get stung as long as you never place your money into a product that charges a fee to withdraw your own money or that imposes a timeframe that limits your ability to withdraw your money.
3. Search Google for a list of “fee-only” investment firms in your area. “Fee-based” advisors are not always true fiduciaries as part of their income comes from selling commission-paying products. Fee-only advisors are compensated by an agreed upon fee and don’t accept, or are even licensed to receive, commissions.
Unfortunately, I don’t see the regulatory environment changing anytime soon and vulnerable investors will continue to be duped by advisors, who claim to be fiduciaries but fail to act as fiduciaries by selling high commission investments and annuities to the public. This travesty will continue as long as the multiple regulatory bodies and insurance commissioners limit their focus on their own perceived jurisdictional responsibilities while ignoring the big picture of what is taking place with the client’s investment portfolios.
If you want an advisor that is truly a fiduciary, one that always acts in your best interest, then it’s critical to understand the potential conflicts of interest that exist in the investment industry before hiring any advisor. My best advice is that you should limit your search for a fee-only advisor whose investment philosophy matches your own.
For the new retiree, it’s a huge challenge to create a plan to transition a career’s worth of accumulations into a retirement full of income that needs to last until the end of life. There are so many factors to consider and every retiree’s situation is unique. So copying your retired neighbor’s plan won’t work. It all comes down to the question: How am I going to create an inflation-adjusted stream of income from my investments that will last for the rest of my life?
There are several retirement income strategies that are widely used today by people that hold themselves out as “retirement professionals”.
Unfortunately, there are salespeople in every community that would have you think that buying an annuity is a good substitute for having a retirement income plan. An annuity’s promise of guaranteed income and protection from volatile markets is appealing to the new retiree. The problem is that these products – with their high fees and low returns – will never keep up with inflation. The retiree that gets talked into following the “annuity ‘IS’ my plan” method may shield themselves from temporary market swings, but they condemn themselves to permanent losses in purchasing power throughout retirement. That’s important because at just a 3% inflation rate, it’ll cost $2.40 in the 30th year of retirement to buy what a dollar bought in the first year.
The perceived value of many in the investment industry is their claim to forecast the future and to pick “market-beating” investments. Unfortunately, the facts reveal that these “sophisticated underachievers” of the investment industry rarely beat market averages over time. Having a plan that’s designed to work through all the different stages of the economy is better than betting on the future direction of the markets – or the future success of a handful of investments.
If equities have historically averaged 10% and bonds have averaged 5%, shouldn’t I be able to split my investments between these two investments and average a 7.5% return? Sorry, it doesn’t work that way! The problem lies in the fact that these long-term averages are derived from a series of annual returns, both higher and lower, that don’t resemble the long-term average. Even though it’s true that large US stocks have averaged around 10% over the long run, rarely has their annual return come close to 10% in a given year. Stocks have historically fluctuated on an annual basis from a high of 54% to a low of -43%.
Taking a systematic withdrawal based on long-term averages will devastate a retirement portfolio when the occasional down year (or even down decade) comes along.
The time-segmented withdrawal strategy was inspired by a Nobel Prize-winning economist and we believe it’s the most reliable, inflation-beating income strategy available today. This methodology matches the retiree’s current investments with their future income needs – just as professional money managers of large pension plans match their investment portfolios with the future payouts to their participants. It only makes sense that individuals have their own retirement income managed the same way that managers of pensions have successfully managed pension cash flows of millions of participants for generations. Yes, adopting methodologies 1, 2, or 3 is easier for the local investment advisor to create and manage than a time-segmented income plan, and that’s why you haven’t heard of time-segmented income plans from other investment advisors. But, shouldn’t your future income be based on what’s in your best interests and not on what’s easiest or most lucrative for the investment advisor?
Peterson Wealth Advisors has taken the academically brilliant idea of time segmentation and transformed it into a practical model of investment management that we call “The Perennial Income Model™”. To get a better understanding of the Perennial Income Model™ you can request our book “Plan on Living, a Retirees Guide to Lasting Income and Enduring Wealth”. For specifics on how the Perennial income Model™ could be applied to your retirement income plan, schedule a complimentary consultation with one of our Certified Financial Planner™ professionals.
At retirement once you have made thoughtful decisions about how to get the most out of your Social Security and pension, the balance of your retirement income will have to come from your investments. The distribution of your investments will need to be coordinated with these other streams of income for tax purposes, as well as to help you stretch your income out to last a lifetime.
We liken the accumulation and distribution of retirement funds to what a skier experiences at a ski resort. Riding the chairlift up the mountain is the easy part of skiing. It takes no skill, and even the most inexperienced skier can ride the lift without running into too many difficulties. The skier simply must stay on the lift and they will get to the top of the mountain. Just a warning: abandoning the lift could prove to be fatal.
Having a 401(k) is like riding the lift. A certain percentage of the worker’s check is systematically deducted by an employer, oftentimes matched, and then deposited directly into an investment portfolio. It is easy, even automatic. But, as abandoning the ski lift could prove to be fatal, not participating in a 401(k), or failing to invest into an IRA, will have catastrophic consequences.
New skiers once off the lift, are bound to have difficulties. Getting down the mountain can turn into a frustrating and even a dangerous endeavor to the novice skier. Help from an experienced instructor is invaluable.
Likewise, new retirees often make mistakes as they begin retirement, crashing, so to speak, as they make poor choices regarding their Social Security and pensions benefits. These mistakes can be compounded if investment accounts are not properly managed and distributed. The key is choosing a proper mix of investments and then properly liquidating those investments to provide an income stream that will last throughout retirement.
So, why is distributing retirement funds so much more difficult than accumulating funds? One only must go back to the decade 2000-2010 to understand how volatility in the stock market impacts the accumulator, versus someone who is retired and is distributing retirement funds. 2000-2003 were awful years for equities. The stock market declined by 49% before recovering. From 2004-2007, the stock market finally gained some momentum, then the worst market downturn since the Great Depression occurred in 2008-2009 (declining by 57%). The net result for the U.S. stock market was that it ended the decade in 2010 at about the same level as it started in 2000. Ten years without growth.
You might ask, how did this volatility and ten years of no growth affect the accumulator? Well, it was a wonderful blessing! Those of us who were systematically contributing to 401(k)s and IRAs from 2000-2010 were able to purchase greater quantities of equities as the price of stocks plummeted during the decade. Certainly, our account balances suffered temporarily, but as the share prices dropped, the number of shares we were able to purchase rose as we systematically purchased beaten-down shares of stock month by month. Once we had accumulated a bunch of cheap shares over the decades, the stock market shot up to record highs. Those downtrodden stocks we purchased so cheaply during the “lost decade” have now caused our account balances to explode with value.
Contrast this with what happened to the unfortunate retiree who was distributing investments during the first decade of the century. Many of those investors were forced to sell their equities at the worst possible time. They had no choice; they had to sell at a loss to provide the income necessary just to pay the bills. Many well-funded retirement accounts were devastated during this turbulent time.
Systematic purchasers of equities do well investing in volatile, down markets, while systematic liquidators of equities are crushed during down-market cycles. During 2000–2010, buyers were blessed, and sellers suffered. This decade perfectly illustrates the difficulty of accumulating retirement funds versus simply managing and distributing retirement funds. The good news is that there are plans that can be implemented to help protect future retirees from having to liquidate equities at a loss to create income, should you be unfortunate enough to begin your retirement at the beginning of a bear market. The Perennial Income Model which we created is such a plan and is further explained in other blog posts and in the video below.
Given the history of 2000-2010, you may think that you will just avoid equities altogether, so you will not be forced to liquidate those volatile investments in a down market. That will not work. Keeping ahead of inflation is essential to having enough income to last throughout retirement and equities are one of the few investments that will be a necessary component of your portfolio.
As we see things, there are only two categories of investments: fixed-income investments and rising-income investments. Fixed-income investments are characterized as slow-growing and non-volatile investments such as bank deposits and certain types of bonds. Certainly, there is an appropriate time to own fixed-income investments. They should be the investment of choice when you have a limited time for your money to grow (less than five years) and you can’t afford to wait out a stock market correction. Fixed income investments protect us from short-term volatility but are damaging to own over the longer term, as they offer little protection against the erosion of purchasing power.
In the long run, the only rational approach to protect against the erosion of purchasing power is to invest in rising-income type investments, in other words, owning equities. As a shareholder, or the partial owner of some of the greatest companies in America, you have the rights to the profits those companies make. These companies pay their shareholders their proportional share of the profits in the form of the dividends. Historically, the dividend rate of the greatest companies in the world, or the S&P 500, has increased about one and a half times faster than consumer prices have gone up. In other words, their dividends have managed to stay ahead of inflation. Besides the growth of dividends, historically, stocks have additionally experienced a tremendous amount of growth in their value.
Government bonds are the classic fixed-income investment. They are very stable and are backed by the federal government. For the last thirty years, these bonds (as measured by the ten-year treasuries) have had an average annual return of about 5%. If $100,000 were to have been invested into these bonds in 1987, the value of that investment would be $460,000 today.
Meanwhile, stocks, the classic rising-income investment, have averaged more than 10% during the same time. $100,000 placed into an investment that mirrors the S&P 500 for the past thirty years would be worth $1,650,000 today. Inflation-beating growth is necessary to maintain your purchasing power over retirement, and that kind of growth is achieved by investing into equities.
When you purchase a share of stock, you become a partial owner of the company whose stock you purchased. As an owner of the company, you are entitled to all the profits and growth associated with that company, according to the proportional amount of the company that you own.
Land, cars, homes, and essentially anything that can be bought and sold on the open market will have a price that fluctuates. Buying and selling partial ownership or shares in corporations is no different than buying and selling anything else, but somehow the simplicity of the concept is lost when it comes to buying shares of stocks.
Far too many times we have had people tell us after a market downturn that they were not going to buy equities until things stabilized a bit and prices rebounded. That is like saying, “I’m not interested in buying that cabin for a 30% discount; real-estate prices are just too uncertain. When cabin prices stabilize, and the price goes back up 30%, I will write you a check.” We wouldn’t conduct any of our other business in this manner. Why do we treat our equity purchases differently?
Certainly, the daily selling prices of corporations fluctuate, but being an owner of a diversified portfolio of these corporations over a long period of time has been and will continue to be the recipe for success. The key to investment success throughout retirement is to have a plan. A plan that overcomes the effects of inflation as well as takes into account the occasional bouts of stock market volatility. You need a plan that matches your current investment portfolio with your future income needs.
If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!
Past generations took little thought regarding how they would maximize their Social Security benefits. After all, it really didn’t matter how and when benefits were claimed if the retiree lived only a short time after retiring. Today, with the real possibility of living three decades without a job or paycheck, retirees need to do all they can to squeeze the most out of Social Security.
Over its almost eighty years of existence, Social Security has evolved. It now consists of hundreds of codes, and tens of thousands of pages of rules and regulations. Because of this, most eligible recipients do not understand the benefits they are entitled to receive. Consequently, there are millions of dollars of Social Security benefits left on the table each year.
While Social Security is complicated, it is essential to make informed choices regarding both when and how to apply. This will ensure you will get the most from the system. After all, you and your employers have contributed to this future source of monthly income since the day you started working. Understanding how the system works and creating an individualized plan to maximize this valuable benefit could mean the difference in hundreds of thousands of dollars of retirement income.
By the time you come to the end of a career, your Social Security income amount is pretty well known. The benefit amount is based on both your earnings history and when you decide to apply for benefits. The accuracy of the benefit estimation makes it easy to build the rest of your retirement income plan around a reliable number.
Once you start getting Social Security benefits, the amount of income you will receive is set. It is highly unlikely that reforms to the system will cause benefit cuts.
Social Security is one of the few sources of income that can be relied upon for a lifetime. It is an especially valuable benefit considering the long life expectancies of today’s retirees.
Social Security benefits are increased each year based on the previous year’s inflation rate, which is measured by the consumer price index. These cost-of-living adjustments help retirees keep up with the ever-increasing cost of goods and services.
Although Social Security checks stop at the death of the recipient, monthly benefits can continue to be paid to surviving spouses and minor dependents.
There is a lot of misinformation that surrounds the sustainability of Social Security, but the boring truth is that Social Security is not going away anytime soon. Each year, the Congressional Budget Office (CBO) reports to Congress the fiscal status of Social Security. The latest report states that if no changes are made to the system, the Social Security Trust Fund, along with income collected from our taxes, will allow Social Security to pay all its obligations until the year 2034. If no adjustments are made to the Social Security system between now and 2034, there will only be enough money in the system to pay 79% of the promised obligations after 2034.
Minor adjustments to the system now could extend the viability of Social Security for years into the future. Raising the age requirements of future claimants, changing how the cost of living adjustment is calculated, or raising the maximum earnings subject to the Social Security tax are all viable measures that should be considered to strengthen Social Security. To date, these common-sense solutions have not been implemented because anytime a politician has suggested a change to Social Security it has proven to be a political boondoggle. Like any financial problem, the sooner the future projected shortfall is addressed, the easier it will be to manage. Making decisions about claiming Social Security benefits based on the false assumption that these benefits are disappearing is both dangerous and irresponsible.
With the ever-changing rules and regulations of Social Security, a list of commonly asked questions such as how much you can expect to receive, spousal benefits, and when to apply can be found here. The answers to these questions will frequently be updated to help you navigate the minor changes to the current Social Security system.
You can also visit the government Social Security website and select the ‘Retirement’ tab to receive assistance on things such as estimating your benefits, requesting a Social Security Statement, and applying for benefits online.
Social Security is responsible for 42% of today’s retirees’ income. While it does not provide enough income to retire on, it does provide a solid foundation upon which a sound retirement income plan can be built. A little time and effort can pay significant dividends when deciding when, and how, to receive Social Security benefits.
If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!
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