A popular financial firm advertises the comfort of being on a green line. What does “green line” mean to you? Imagine you gave your money to a green airline and said I’d like to take a trip. They said sure and then you landed in Greenland. However, you only packed for a day trip and that the ticket was for one way?
Retirement Planning for Sustainable Retirement Income
How much money do you need to save, for how long and at what rate of return so that you won’t run out of money? If you run out money during retirement, then your plan is not sustainable. Typically that is not what comes to mind when many people think about sustainability.
Take the typical company 401(k). Is the company or their chosen advisor helping you calculate the retirement question? Are they discussing ways to turn your savings into sustainable or lifetime income? The typical plan does not. If it did, I doubt that the average investor would have just $25,000 in retirement savings.
At age 70, $1,000,000 invested a single-premium immediate annuity, fixed annuity with a 3% annual raise would provide roughly $71,000 annually based on today’s rates from an A rated insurance company. (See our previous blog Personal Pension Planning: One Path to Retirement Income).
Sustainable investing should follow the same path as non-sustainable investing. You should determine what rate of return you need to reach your goal, and then invest your money based on accepting and taking the necessary risk Many investors just try to make money and don’t have their investments tied to a risk return tradeoff. Armed with your rate of return decision from your retirement plan the next question to tackle is what investment path should you take? If issues of the environment, tobacco, human trafficking and animal welfare are issues for you, you would likely want to take the path of investing known as socially responsible investing (SRI), environmental, social and governance (ESG) or sustainable investing.
If your retirement savings is in an IRA, a brokerage or taxable account, you can choose investments that screen for these issues. You can either do that by picking specific companies or use pooled investments from a variety of investment companies that do so.
Implementing green investing
There are two overall investment implementation strategies to pursue: passive and active. A passive implementation believes that it is futile and ultimately costly to try to choose the hot stock pickers (or bonds) for your investments. Research shows that it is impossible to know in advance which stock picker will be right. If you keep changing the stock picker you are betting on, the returns from switching will have to be higher because of the increased costs of trading.
Active implementers believe that stock pickers can beat the market or more accurately, the specific sector of that stock picker’s expertise. Some focus on big companies, some small, some domestic and some international.
Either way you decide to go, the biggest decision is the asset allocation you pick. That is essentially the recipe you are following with what sectors, stocks and bonds you are choosing. You may find that what you hold dear to support or not support will require some tweaking to your asset allocation and possibly the other answers to your retirement question.
I recommend interviewing some advisors and finding the one that understands the importance of your values and then integrating them into your sustainable retirement plan. Likely you should choose a financial advisor that specializes in helping people invest consistent with their values. Why? First, some advisors will tell you that you your values will get in the way of making money. Some of those advisors are aware that they could make more money from other options. Some only assume that to be the case and believe their untested assumption.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI
(2) This is a hypothetical example. Your results may vary. Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply.