Even if you love your work, it’s likely you plan to retire at some point in the future. Or, if you don’t care for the word retirement, perhaps you want to plan for your financial independence. So let’s talk about retirement planning for women.
Regardless of what you want to call it, retirement planning for women is an important part of my clients’ financial plans.
Over the years, many journalists and authors have attempted to simplify retirement planning by reducing it to “your number” or a “retirement readiness” evaluation.
And there is no shortage of information available on the subject. Currently, Google has millions of search results for “retirement planning for women.”
Yet despite all the information available and widespread attempts to demystify retirement planning, many women are still unprepared. And if you’re a woman who’s now on your own as a result of divorce or widowhood, it’s easy for the idea of retirement to seem overwhelming.
I’ve got good news for you! Retirement planning can be both simple and effective – as long as you have a plan that focuses on the things within your control.
Don’t have enough saved to achieve your ideal vision of retirement? Have no fear. Let’s work together to figure out the choices you have and the trade-offs among them.
For instance, you can save more, work a year or two longer, spend a little less in retirement or, if you’re willing and able, take a little more investment risk.
Unfortunately, most financial advisors are only focused on your “risk tolerance” and getting you to save as much as you can, even if it compromises your current lifestyle.
But there’s a better way. Through the Wealthcare for Women planning process, we can plan for a comfortable and confident retirement while also making the most of your current lifestyle and each step you take along life’s journey.
Regardless of your age or occupation, many of you plan to retire at some point in the future.
So let’s assume you’ve arrived at that point in your future.
Whether you’ve just retired from a tenured teaching position or are hanging it up after years on the road as a commission-earning salesperson, your income – whether it was consistent or not – is going away.
Hopefully, you’ve done a good job planning and saving for this day and the years that follow, but it’s still an uncomfortable feeling.
You’re walking away from a stream of income, and even though you had to work in exchange for that income, now that the income is going away, how will you make your finances and your life work?
I have some good news for you.
You can create a paycheck for yourself in retirement.
However, instead of your paycheck coming from ACME Corp., it will now come from your savings and investments.
Many people plan to retire and live on the dividends and interest from their portfolios. They consider their portfolio principal to reside behind a sheet of glass with the words “break glass only in case of emergency” written in bold red letters.
For some, this approach might work.
But there is more than one way to skin the “retirement income” cat.
Let’s say you have a portfolio worth $2 million that you’ve accumulated over a 40-year career.
If you retire and put your entire $2 million into 10 year US government bonds, you could, based on today’s interest rates, generate approximately $37,600 per year in interest income. As I write this, the yield on the 10 year Treasury is at 1.88%.
Even if you’d be happy with this level of income, your principal is losing purchasing power every year as inflation slowly (but surely) erodes just how far those principal dollars will go in the future.
There is a widely accepted and research-supported rule of thumb that indicates you can take 4% from your portfolio each year to create a sustainable income stream that will withstand every economic and market environment we’ve ever experienced.
And the “4% approach” will conceptually leave enough potential growth in your portfolio to keep up with inflation over time.
So there. You just went from a 1.88% yield (based on 10 year Treasuries) to 4% portfolio yield.
In dollar terms, that’s a “pay raise” from $37,600 per year to $80,000 per year (4% of $2 million).
But I hate rules of thumb, and you should too.
The 4% rule ignores how much investment risk you’d have to expose yourself (and your money) to in order to make the numbers work.
And this particular rule of thumb doesn’t account for the fact that you may want to spend more in your earlier retirement years and less in your later retirement years when you might be less mobile and less active.
At this point, your friendly broker or insurance agent has the solution you’ve been looking for. Sure, 4% sounds great, they say, but what happens when the market goes down? If your portfolio drops by 25%, your 4% (now on a portfolio worth $1.5 million) is only $60,000 per year. You’ve just taken a 25% pay cut based solely on the whims of the market.
What if, they ask you, there was a product that gives you market returns when the market is going up, but offers complete protection when the market goes down?
No, it’s not too good to be true, they say. Just put your money in an equity indexed annuity contract.
What they often fail to mention is that your money is locked up under sizable withdrawal penalties for 6-10 (or more) years, market performance doesn’t include dividends (which is a bit part of market returns over time), and they’re going to charge you somewhere between 2-4% per year for the privilege of this not-so-perfect insurance product.
For more on the trouble with annuities and their guarantees, read this.
Here’s what I suggest . . . think of your retirement income and your portfolio like a pension.
While corporate pensions are becoming increasingly rare as more companies move to defined contribution plans like the 401k, the way pensions are managed (when done responsibly) offers an important lesson in how I think you should manage your personal finances.
At a high level, a pension (also known as a defined benefit plan) is a pool of money that you and/or your company contributes to that is designed to pay future benefits to you and other company retirees that meet certain eligibility requirements.
Pension plans for the largest companies often have hundreds of millions or billions of dollars in them and are (or should be) invested in order to reduce unnecessary risk while maintaining a reasonable level of confidence that it can pay future benefits to retirees. These future obligations are referred to as “liabilities” in the pension management and consulting world.
In years when the market is doing well, the plan might become “overfunded.” The pension investment committee can evaluate opportunities to reduce investment risk or increase pension benefits to current and future recipients. Or they can reduce company contributions to the plan.
In years when the market isn’t doing well, the pension might become “underfunded.” The pension investment committee can evaluate whether or not to increase investment risk or possibly even reduce benefits to current and future benefit recipients. The company can also elect to contribute more funds to shore up their pension plan’s ability to pay future benefits.
While the market fluctuates year-to-year, so too can the value of a pension fund. However, the future liabilities of the pension fund — the benefits that will be payable to current and future retirees — remain largely the same. And many of these pension funds are stretched thin to maintain benefits to their retirees who are living much longer lives.
As a result, many company pension plans are underfunded.
So what does this have to do with your retirement income and other financial planning considerations?
A lot, I think . . .
If you look at your retirement income like a pension plan, I think you’ll begin to see many common threads.
You have a pool of investments today that you’re hopefully adding to through savings and prudent management.
You will have future expenses and financial needs to plan for like educating your children or grandchildren and securing a comfortable and confident retirement for yourself.
And guess what?
You can — and should, I believe — manage your financial plan and investment portfolio just like a company manages their pension.
If you know what your investment portfolio is worth today and how much you plan to add through future savings, we can then look at your anticipated future needs and use probability analysis to account for the uncertainty of future market returns.
And just like a company’s pension plan, your personal financial plan can be in an over- or under-funded state.
Or it can be in what my planning team and I refer to as the comfort zone. Your comfort zone is personalized to your situation and goals, and being in the comfort zone indicates enough comfort and confidence, but not too much.
In other words, if your plan is in the comfort zone, you’re not over-funded or under-funded.
But the real power of this approach comes from regularly reviewing and making the necessary adjustments to your plan.
If you have changes in your personal or professional life, you might need to adjust your plan.
If the market does well over a period of time, you may be over-funded and you may be able to lower your investment risk, increase your “benefits” (how much you can spend in retirement or for other goals), or you might be able to achieve one or more of your goals sooner. In fact, you may be able to afford some combination of all these.
Inevitably, the market will go down and you might become under-funded. And depending on how far and fast the market drops, you may have to increase your investment risk, lower your plan “benefits,” or delay one or more of your goals.
This ongoing process of updating your plan and making the necessary – and hopefully small – adjustments along the way . . . this is financial planning.
So next time you or your advisor are tempted to focus on an investment or financial decision in isolation, I would instead encourage you to think about it like it’s part of a pension plan.
Is your plan currently over-funded?
Is it under-funded?
Do you know?
In plain English, why couldn’t you create and manage a flexible retirement income plan that reflects your personal situation, preferences, and priorities along with changing personal, professional and economic circumstances?
In this scenario, you can literally have a dollar amount transferred to your checking account once or twice a month (much like a paycheck) and when the market does well, you could potentially:
Conversely, when the market goes through a bear market cycle, you can:
Makes sense, doesn’t it?
And by the way, over time, this approach can likely create greater average income from your portfolio than even the 4% rule of thumb.
But as you may suspect, this only works if your personal plan is the centerpiece of your financial planning and decision-making process. Creating a plan once, and only looking at it every 2 or 3 years won’t cut it.
In fact, you don’t need or want a plan at all.
You want “planning.”
You want the verb, not the noun.
It’s an ongoing process where you don’t rely on forecasts or yesterday’s news. You simply update your plan on a consistent basis and incorporate new information as you get it. Then you stress-test your plan to see what might happen in the future based on what you know today.
This isn’t a forecast. This is an exploration of all the potential outcomes you may experience, and then you can establish the right combination of your goals (based on your priorities) that gives your plan sufficient comfort and confidence of working in all types of future environments as long as you continue to make small adjustments along the way.
This is an important concept and is counter to most financial advice that is dispensed today.
For more on this concept of managing your portfolio and retirement income like a pension, read this.
If this personalized, flexible approach sounds interesting to you, I’m pleased to let you know that it’s a fundamental premise that’s baked right into my financial advice process.
If you’re ready for a fresh approach to retirement planning for women, give me a call and let’s start with a conversation.
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