Challenges to Retirement Income Planning and How to Overcome Them
Living off your retirement savings whether you are nearing retirement or still years away from it is an issue that you want to plan for. You could very well be actively contributing to some sort of retirement account in order to address this. Whether it is your company’s 401k plan, a brokerage account, Roth, or maybe all of the above, the act of savings for retirement is an important first step to a longer-term retirement plan. However, how do you parlay your years of savings into a legitimate source of retirement income down the road? We believe that in a MDRN world many of the strategies that advisors have suggested to their clients to address this issue no longer apply. Strategies such as buying annuities and focusing heavily on assets like bonds have become less optimal over the years. In this article, we will discuss why retirement income planning has changed and how to potentially address it.
Pensions Going Extinct:
It is estimated that only 4% of private sector employees have a pension plan. Down from roughly 60% in the early 1980s. For decades, a critical piece of many people’s retirement plans was the reliance on their company pension to supplement their income. That responsibility of finding a fixed source of income to supplement social security has now shifted to you. The solution to this problem that many financial advisors have pushed is to simply buy your own pension in the form of an annuity. Although it is wrong to assume all annuities are inherently bad, at MDRN Wealth it is our belief that it generally does not make sense to buy an annuity. The reason for this is that annuities tend to be expensive and lack liquidity. Once the decision has been made to buy one, you usually cannot exit without paying steep penalties and fees. As a result, there may be better options and flexibility in other investments.
Interest Rates are Lower:
Another issue that we face in the modern world is that interest rates are historically low and nowhere near resembling the rates of the 80s. I can’t tell you how often I have worked with clients who have either personally experienced or had family experience the days when you could buy a 10-year treasury note with annual interest of over 10%. This period in history although in theory could repeat itself, it is unlikely. The Federal Reserve, which heavily dictates the direction of interest rates, has learned from those days that rates at that level can hurt an economy. Ultimately, we cannot plan for interest rates to rise to that level. As a result, we live in a world where yields on treasuries and traditional bonds are significantly lower. So as a retiree or someone nearing retirement having a portfolio exclusively made up of these securities, when factoring in inflation, creates a portfolio with minimal real return.
Dividend Yields are Low:
If you look at the average historical dividend yield of the S&P 500, it has historically been around 4.3%. As of the end of 2021, that dividend yield is now only 1.3%. The days of strictly living only off dividends that stocks produce are simply not viable for most people in our current day.
Markets are Volatile:
Since 1950, the S&P 500 falls into a pullback of 10% or more every 1.9 years. These pullbacks historically last for about 6 months. If you are accumulating wealth and don’t need your retirement money now, then it may be easy for you to stomach this volatility. But imagine you have retired, there’s no income coming in from work anymore and all you have is your life savings. At this point, seeing your money drop 10 percent or more might be a lot tougher of a pill to swallow.
Everyone has a different opinion on this issue. It is our belief that if you are someone in your 60s or late 50s or even currently taking social security, you very likely won’t see major changes to it. It could be political suicide to ruffle the feathers of an entire generation that has waited for and relied on social security. It could also create harsh economic conditions. However, if you are someone much younger, there is a strong possibility that you will see major modifications to social security. These modifications could be the outright reduction of benefits, a change in what is considered “full retirement age” and more. Because of this uncertain future, it is important that you plan your retirement income strategy accordingly.
Living Off Your Savings in Retirement:
So we have covered the bad stuff and what’s working against you when building a retirement income portfolio. Now, let’s look at how we can address these issues. At MDRN Wealth we believe in taking a total return approach to retirement income. What this means is that you combine elements of:
- Fixed Income
- Alternative solutions
into one portfolio to create a retirement income strategy. This allows you to not be dependent on one investment characteristic. For example, if we exclusively focused on just using investment grade bonds for generating income, our portfolio might have more stability but the total yield and return of our portfolio would be relatively low.
However, if we use different asset classes for what they are good at, we can create a more stable portfolio that provides diversification, income, and growth. Think of the portfolio like a sports team or a team at work. Everyone has a task they are focused on, and everyone has their strengths and weaknesses, but when we combine them together, they can create a great team. Depending on your goals, life stage, risk tolerance, and more it is important to have a tailored investment plan creating the appropriate and game-winning “team” for you. Everyone’s “winning team” may look a little bit different. Contact us today to discuss how to best create your Allstar retirement “team.
MDRN Wealth LLC (“MDRN Wealth”) and its Wealth Advisors do not provide any tax/legal advice. Consult your own tax/legal advisor before making any tax or legal-related investment decisions.
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