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Don’t think you can afford a financial planning service? Wondering if you are doing the right things? Heard no financial advisor wants someone with your limited account size? We believe true financial advice is not limited to investing. It provides advice on clarifying your goals...
Some people are shocked when they hear my transparent, financial advisory fee. Some of those people have 401(k) accounts or IRAs where they pay commissions. However, they don’t know what share class means nor have an idea how much...
Is your financial plan compromised because you lack the time to take a more comprehensive look? In trying to compensate for your lack of time are you not questioning key assumptions? If so, your plan may be built on faulty...
A financial vault accessible from any internet connected device can help in a pinch. In a fast-paced life, it is easy to lose track of your assets and financial documents. It is even harder to find them after they have...
Everyone who calls themselves a financial planner is not legitimate. The 2008 Value of Financial Planning Study conducted by The Financial Planning Standards Counsel of Canada highlighted this issue. Of those respondents who thought their planner was a CFP®, 70.8%...
Most people haven’t taken an undergraduate class on investing, much less 401k investing. When the 401k was introduced it had a limited number of choices. Then, due in part to technological advances, the number of choices began to balloon. I have...
What is your definition of financial independence? I believe we should retire the word retirement and use financial independence instead. When you hear retirement, do you think things like not working, receiving Social Security and the like? You...
Have you ever saved up for something, only to find that it was more expensive 3 to 5 years later? Many people find themselves in sticker shock when...
Does the term financial life plan make you think a blueprint for how to reach your life goals? Some categorize goals in terms of needs, wants and wishes. I prefer to use the word dream rather than...
When contemplating divorce, many people put themselves under undue stress as they worry about their financial well-being. Much of that stress is due to the fear of the unknown...
I was recently asked to help some independent contractors with their retirement savings needs. Many people try to use some preset thought process of how to save for retirement. Often it is based on getting a matching contribution or some rule of thumb such as saving...
When it comes to retirement income, a lot of people worry about running out of money as they age. On the other hand, when retirees are set up with fixed-income strategies (via a pension or annuity) they’re often working on a budget, which creates some...
When it comes to retirement income, a lot of people worry about running out of money as they age. On the other hand, when retirees are set up with fixed-income strategies (via a pension or annuity) they’re often working on a budget, which creates some risk if you go on a spending spree in retirement. So how should you think about retirement income, longevity, and creating an effective plan to make sure you don’t outlive your money?
The biggest challenge in retirement income planning is longevity. If you die the day after you retire, you’ll have plenty of money left over for your family to inherent. On the other hand, if you live past 90, you may run out of money and be forced to turn to unexpected sources to supplement your income.
Keep in mind: running out of money is not the same as having enough money as one ages. You may not have as much money as you like, but running out of money means running out of enough money to live on.
For example, I had a client who qualified for a $75,000 a year pension. The problem was that $75,000 would be the same 30 years later, there was no cost of living adjusting. At the time, we first talked, he was 62. The purchasing power of $75,000 is not going to be the same if he lives into his 90s (his mother was 92 at the time). With a 3 percent annual inflation rate, you’d need more than $182,000 in 30 years to be equivalent to $75,000 today.
I want to tell you a story about my buddy Bill. Recently, Bill lamented that he didn’t have a pension. I told him that he could have a pension if he wanted to. He looked confused, so I explained the concept of a single premium immediate fixed annuity (SPIA). This type of fixed annuity can be purchased to provide you with income for life. Even better, you can add a cost-of-living adjustment increase. One of my clients purchase one with a 3 percent annual increase for life.
(There are a lot more details involved in an annuity purchase should you choose to do so, but the important part here is understanding how they function.)
Bill didn’t like the idea of purchasing a SPIA since he’d have to transfer money from his bank account to an insurance company now. Even with the guarantee of lifetime payout, and the regulations placed on these insurance companies to ensure solvency, Bill was still uncomfortable. There’s also an insurance/reserve account and all insurance companies pay into to further mitigate the risk of policyholders being harmed if an insurance firm becomes insolvent.
Did I also mention creditor protection?
Even though he wanted a “pension,” he rejected an annuity because, “What if there is something I want to buy now, and don’t have the funds because they’re tied up in an annuity?” It’s a similar train of thought to people who put off savings because they have better ways to spend the money now. And yet, Bill continues to ask me why his accounts are draining faster than he can replenish them.
There are a lot of ways to generate income in retirement. Some advisors want clients to create a nest egg big enough that clients can live on interest alone in retirement. Others focus on withdrawing a strategic amount of principal each year. However, the mathematical calculations behind this model are complex and haven’t performed well in bear markets. There’s also an annuity-based income strategy.
Because my parents benefited from pensions, I may be predisposed to the annuity model. Plus, I find many of my clients aren’t interested in complex withdrawal or retirement income strategy. They don’t even use the term retirement income. Most people I know just want a simple strategy like the one single premium immediate annuity provides.
Is this a strategy you need or want to learn more about? Contact us to learn more about annuities and how they might work for you.
Values-Based Financial Planning
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