If you’ve been working for quite a while, your financial life has probably been managed to the rhythm of your paychecks.
If you’ve managed to stay employed, it’s probably worked well – money comes in and goes out on a nicely predictable schedule. There are times, however, when something unexpected comes up, and you wish you could get an advance a couple of weeks early, or get more at the beginning of the month than at the end.
Suppose your boss were to announce a radical change in payroll policy. Instead of issuing regular paychecks, your company will henceforth deposit a lump sum into an account for your benefit, which you can withdraw at any time, and in any amounts. In other words, you now get to pay yourself!
Sounds like a great idea, right? You now have complete control over your cash flow. What’s not to like?
Well, ask any retiree living on his savings what he thinks of being the captain of his cash flow in retirement. You’ll probably find that, far from feeling powerful and in control of his finances, he is anxious and bewildered by all the decisions he must make.
How much can I take without running out of money? How do I make sure my investments generate enough income for my needs? Which accounts do I take from first? What is the right asset allocation for my retirement money? What happens if the stock market crashes … again?
Given the number and complexity of these questions, it is not surprising that many retirees are attracted by one-stop strategies, or investment products that seem to do all the hard work for them. For example, they may have heard that as long as they only withdraw a given percentage of their portfolio each year, they will be OK for their lifetime. Or if they purchase an immediate, fixed annuity, they’ll regain the security of that regular paycheck and not have to worry about portfolio investment decisions. Or they may think a retirement income payout fund is the ticket to a good night’s sleep.
The reality, however, is that generating retirement income requires frequent decision-making. There is no one solution or product that will be good for the duration. The challenge faced by individuals generating their own retirement income is comparable to that of a NASA engineer trying to land a space ship on Mars: Everything may be optimized and perfectly calculated at the launch to give the highest probability of success, but without midcourse corrections made along the way, the likelihood of getting the ship to its target is very low.
For this reason, having an ongoing relationship with a financial professional who can help advise on the needed tweaks and adjustments over the course of retired life is, in fact, as close to a “one stop, sleep soundly” solution as it gets. Although, that’s not to say there aren’t many components that the financial planner will be monitoring and managing. Key among them are first, the retiree’s spending plan; second, the investment allocation and security selection with the retirement portfolio; and third, making tax-smart withdrawals from the portfolio accounts.
Click here to learn more about retirement spending -- the most critical factor in determining whether a retiree is likely to run out of money before he runs out of life.