I didn’t think that was a word either but according to Morningstar and the attached comprehensive retirement planning video, it is.
Your retirement, whether it be for you, a client, or a family member, is all part of a plan that is supported by pillars much like legs under a stool. This is your foundation and, as illustrated in the video, it must be solid for success.
What is the number one nemesis that almost everyone one of us will fear as we grow older? Will it be the fear of dying? No, we will fear running out of money and outliving our resources and potentially being a burden on our children. This is also addressed in the video. Regardless of our profession, whether we are the client or the advisor, this brings us all together as one. We all will eventually need a plan. Today it may just be helping someone so they can make a decision as a client, but tomorrow it may be you taking care of your parents or providing critical guidance and direction for an older family member. The video I have attached is well worth your time dissecting the components and elaborating on the importance of such a plan.
I am going to break down the pillars of retirement as I see them and then lean on the video so you can share in the wisdom of seasoned professionals as they discuss the topics.
A foundation for retirement will focus on asset preservation and a stream of consistent income. Retirement income will be derived from Social Security, Pension, Investments, Qualified Retirement Accounts, and lastly, Annuities. You may notice that there are five legs to this stool, but this is not realistic because many people do not have a pension or possibly savings outside of a retirement account. Realistically, most people may only have three legs under their stool. Others may only have two and may need to improvise. Ideally, we would all like to have four, but a foundation with a three legged stool still works if the plan is solid.
Let’s look at the foundation Pillars.
- Social Security: The question with Social Security will be “when”. The longer you wait the higher level of entitlement. An annuity to supplement your retirement income or a form thereof may create an option to allow you to delay this entitlement and achieve a higher benefit.
- Pensions: A government pension is a very solid leg under your stool that most people will not have.
- Investments: How do you invest for income in this zero rate environment and not risk your precious principle reaching for yield? Capital preservation will be a critical element of long term success and the need for this will point back to investigating all your options to create a strong foundation. This is a key focal point of the video.
- Retirement Accounts: How do you target and manage your withdrawals based on your age without over taxing your accounts when the markets fluctuate or go down. Vanguard and others have special Distribution Focus Funds as illustrated in the video that will help you achieve these goals based on your age.
- Annuitization: If you have savings and investment do you give it to an insurance company for an annuity and trust the payments will survive and be there when you expect? This is a very important question. Please listen to the principal of Vanguard in the video and what he says about the importance of an annuity and the comments on the providers.
Now on a personal level I don’t believe in commercial annuities. Maybe I am more receptive to the message or maybe it’s as a result of me losing 99.72% of my investment during the crisis in AIG. You know American International Group the blue chip global insurance powerhouse that was toppled by ten people in their derivatives unit and required a $180 Billion government bailout. You might be surprised how many other insurance companies almost went bust. I have an Uncle that was the CEO of a very significant one that was lucky to survive. All blue chips just like Fannie Mae and Freddie Mac and regulated by our government.
As we look to gain perspective, I am going to assume based on the hundreds of people I have spoken with over the past couple years, the goal will be just to get to a three legged stool. Most people will only have Social Security and retirement accounts and no significant savings or investments that would provide them with the privilege of considering an annuity. Given the importance of achieving a safe and secure foundation, this is where the Reverse Mortgage enters the equation.
For those with equity in their homes a Reverse can serve as a critical pillar of a foundation and be tailored to pay off debt and cast an annuity-like payment without the risk or cash requirement of a commercial annuity. A Reverse is government insured and can be established to preserve equity and supplement income. Once cast, this annuity-like payment could easily replace the solid nature of a pension component as a dependable leg supporting a critical foundation for retirement.
Please note that not all Reverse Mortgage configurations focus on preserving home equity while accomplishing a greater good. Please also note that the experienced advisors in the video stress the importance of annuitization, but never outright mention a Reverse Mortgage. This is my suggestion, as an optional component, as part of the thought process following the advice in the video.
This is an opportunity to gain perspective from what I have outlined and the video and plan for ourselves and our clients. The Morningstar video is an excellent start.
I hope you enjoy it and find it worth your time.
How to Build Your Income Stream
As yields remain low, today's retirees have to really think out of the box when it comes to
building an income stream; noted advisor Harold Evensky and Vanguard's John Ameriks
explore practical strategies to obtain income without overstretching for yield.
The right choice will help you bridge the path to a more sound and secure retirement. Start at www.jeffersonmortgage.com Reverse Introduction.
Blogging from the front line.
George H. Omilan
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