The word retirement is like candy to Wall Street. They use the word to connect to anything that will allow them to tell you about a product that will miraculously fix or improve your life while retired. The latest craze is to tell us that everything has changed… out with the old and in with the new. Being retired is different for everyone, but one main theme is true for all, and has not changed at all, we need to generate income. Since we have seen a huge drop in the traditional pension plans which have been replaced with 401k plans, Wall Street sees dollar signs. After all, more than 52 million Americans have a 401k plan. There is in excess of 4.8 trillion dollars in these plans. Why not create a way to capture new fees on these assets as plan holders retire? Now you know why there is so much interest in retirement, that one day event. It triggers the movement of money and Wall Street wants to be the first in line with their hand out. You, the one the money belongs to, needs to be the one who controls the process, not Wall Street. With that in mind…
Remember the goal – income replacement. The goal to achieving that is SIMPLE! Keep it simple and you will make decisions you can live with going forward. The options for creating income are limited only by your willingness to accept risk of principle. That is why I subscribe to the” keep it simple” method of income planning. Using investment products that have a defined life or guarantee is the simplest method of controlling risk. Let’s step back for a second to the days of old and look at a certificate of deposit (CD). They are a simple design. You add your money to the CD and it pays a specific rate of interest until the CD matures at a predetermined time, guaranteed. For example, with $100,000 in a three-year CD with a yield of 3% per annum, you would receive 3% on your money annually and in three years when the CD matures your principle would be returned. You could then roll it over at the current rates and terms. Now, that is simple. But, in a day of lower interest rates investors/(retirees… ugly word) have had to look elsewhere and Wall Street, insurance companies, real estate companies, oil companies, and just about everyone imaginable have designed products with plenty of sizzle, but the steak carries risk of hoof and mouth disease i.e. risk of principle.
In the vein of simple, you can look to annuities to provide a straight forward approach similar to a CD. They are called MYGAs (multiple year guaranteed annuities). They allow you to defer your accumulated earnings until you need it for income. They are DIAs (deferred income annuities). They allow you defer income distribution until you need it to start. They are SPIAs (single premium immediate annuities). They allow you to start your income immediately. They are QLACs (qualified longevity annuity contracts). They allow you to defer qualified money until you need the income. None of these are Indexed Annuities which are complex, and similar to chasing a rabbit down a hole into a fantasy world that never quite works out. They are not Variable Annuities which take on the risk of the markets along with too much complexity in the income structure….again chasing a rabbit down a hole. Remember, the mission is simple, guaranteed principle, defined specific period of time, and guaranteed income. Annuities can offer solutions based on your objectives, now and in the future, if you keep the mission simple.
In the same simple vein, bonds offer a straight forward approach to a CD. They offer multiple maturities, payouts, specific interest rates for a defined period, taxable, tax-free, or deferred. They are equally simple. They are not in mutual funds, closed end funds, or variable annuities… they are bonds you purchase outright and hold to maturity, as defined by you when you purchase them.
There are other investment opportunities that offer similar approaches to these, but in the vein of not wanting to bore you, or put you too sleep we will discuss those in future articles and posts. Remember,
retirement is a transition from working to not working. The connotation that goes with it is simply transitioning your money to create income. Preferably, that is income that is guaranteed, for a specific period of time, and simple to understand. Anything else introduces complexity. Complexity produces errors in future fulfillment of a variable promise based on market and human intervention. If you choose to chase the rabbit down the hole to a fantasy world, you do so at the risk of your money and your future income.