Published August 15, 2013
I certainly hope that you know by now that when it comes to retirement, there is no silver bullet. Wall Street and the financial industry, in general, spend a lot of money every year to convince you that it is all about accumulation when it comes to financial success or retirement. Certainly the ability to save and accumulate the most money possible for retirement is a lofty goal, but it is often misleading and lends itself to unexpected risks.
I think we have all heard that in real estate it’s about location, location, location. Well if you think about it, retirement should be income, income, income. This is where we believe Wall Street does not have the answer.
The Paradigm Shift
Instead of thinking in terms of what’s my number or $1,000,000 is my goal, we believe you should ask yourself the question: How much after-tax income do I need to live for the rest of my life adjusted for inflation. And the next question should be: Am I on track? If the concept of retirement is about security and you look at pensions, why do people associate them with security? It’s because they were designed to replace your income when you stopped working and provide you with the security that you had another income source along with Social Security that you could not outlive.
The goal was not to accumulate the most money. These plans have faded, the responsibility has shifted, and it is up to the individual to keep their retirement dream intact. Your perception of retirement might not be your reality and this is the lesson that everyone needs to be in touch with.
A Changing Economy and a Financial Conundrum
The ever-changing landscape of the economy, government intervention, entitlements under pressure, demographics, and the Federal Reserve have created a whole new set of headwinds that we will all face when we finally get to that day when the paycheck stops and we have to start living of our own assets.
Interest rates, inflation, and market volatility create the ultimate conundrum for investors. The individual keeps trading one risk for the next in their quest to protect their assets, find yield for income, or chase rate of return. As markets reach all-time highs and you want more safety and you move assets to bonds or cash, you trade market risk for interest rate risk or inflation risk. If you move into equities to protect your assets from inflation, you increase your risk of loss due to volatility. The cycle continues and the impacts can be catastrophic. This should force the individual and advisors to rethink their approach to retirement.
Financial innovation, just like the music industry or the automobile manufacturers, must continue to innovate and bring new products, concepts, and solutions based on the changes that have happened and the headwinds we face when we get to retirement. . The industry has made changes such as low costs indexed mutual funds and ETFs, products that provide better solutions to protect assets, create income, and deal with long-term care costs. For the individual to take full advantage of the opportunities that exist, they must take an active role in financial education and seek out advisors who don’t try and solve the same the old problems with the same old solutions
A New Thought Process
The old adage of save 10% of your income, invest it in the market and make 8%, and you can safely withdraw 4% and your money will never run out is at best a gamble. Believing that retirement is a moment in time and your goal is to get to some mythical number is something that has been created through marketing and concepts that were from a different economy.
We want our clients to answer the question: How much after-tax income do I need every year adjusted for inflation to live the life I want in retirement? We then want to work with them to see if they are on track? And if not, what we must do to get there. And if I am on track, what we must do to keep them there.