Picture a world in which every retiree is well-prepared for retirement and has a realistic idea of how much sustainable income they'll need to last a lifetime. To get to this point, we must start thinking about "beginning with the end in mind." Starting with the end in mind is how any great outcome is achieved or task accomplished, and a successful retirement is no different.
To embrace an investment strategy that establishes sustainable income as the goal, advisors and investors must know when to stop focusing on the accumulation of retirement funding and start paying more attention to the end goal of retirement funding, which is the creation of retirement income streams.
Too often today, the financial industry conditions the minds of investors to focus solely on their assets as a lump sum and the goal of portfolio management has been exclusively the accumulation and preservation of that amount. Therefore, one hurdle to a successful retirement outcome is to create a mind shift, a conversion of sorts on how we all think about our assets and resources.
Maybe the most obvious, but often over-looked change, is the regular income required to supplement one's lifestyle. This periodic distribution can be devastating to a portfolio designed exclusively for accumulation. Investor's today often select savings rates at insufficient levels, invest in portfolios with little understanding of the underlying risks and rewards, and fail to do even rudimentary calculations of how much money they'll need in the future. They are driving on the path to nowhere looking out the rear window!
The good news is that there are simple steps an investor can take to achieve retirement income during this journey. As with any significant challenge, a single answer or cure-all does not suffice and there is no quick fix. Sufficient retirement income is an outcome to a dynamic process that starts with a lack of bias. The best solutions flow from a proven process and income planning is no different. For it to be effective, it has to have at its foundation an unbiased view of the investment world. It is the recipe card that allows the investor to taste a satisfying meal and then go back for more and more. This dynamic approach to portfolio management sets the framework on how to evaluate whether an asset class, an ETF, mutual fund, stock, bond or REIT should be included in a portfolio. Today, investors do not suffer from a lack of choice, but from a lack of focus, priority and process.
Here are four initial steps that any investor can take to start on the road to dependable retirement income:
1) Embrace an income mind set for you portfolio. If your portfolio is going to be a source of retirement income, then the investments need to be analyzed and ultimately utilized with that goal in mind. Just because an investment product worked during your employment years does not mean that it's appropriate during retirement.
2) Establish a very practical "real number" that serves as the monthly income needed to support your lifestyle. One needs to understand that a successful retirement is the management of the relationship of asset value to income need, so establishing a clear income goal is critical.
3) Match that "real number" to the ability of your portfolio to support it. This requires an important calculation best done by a professional who understands sustainable withdrawal rates and the conversion of a lump sum into an income stream. Our clients, for example, know that they retire at a monetary number, not merely an age.
4) Integrate all sources of income. Social Security, part-time work, pension plans, IRA's and 401(k)'s all need to be analyzed as part of an integrated tax-efficient income plan. How an individual utilizes their income sources needs to work in concert with each other.
It is important to not be overwhelmed by the steps, but to embrace the goal. Once these steps are taken, it sets the groundwork of planning that opens the door to the important work of investment selection and asset deployment. Investors who are willing to reverse engineer their portfolios will be able to retire with confidence that financial independence is clearly the end they should have in mind.
David Giegerich, Paradigm Wealth Management LLC Bridgewater, NJ
Financial Advisor offering securities through First Allied Securities, Inc. Member FINRA/SIPC