Guest Financial Blogger: Nick Naseman
Compared to previous generations, today's retirees face a more confusing challenge when determining how to fund their retirement. Pension plans are almost non-existent and Social Security is unlikely to provide the necessary income to maintain a comfortable lifestyle. Add in the wide range of ever-changing products and never- ending barrage of sales and marketing messages targeting older Americans, it’s no wonder seniors choose to continue doing what they’ve always done with their portfolios. Most people have heard of the 4% rule when it comes to retirement income. Unfortunately, that rule may have worked in the early 1990’s when William Bengen conducted his research but has a slim chance of success in today’s environment.
Bengen’s approach is considered a probability-based approach (stock market based), which uses a Monte Carlo simulation to estimate a retirement portfolio’s probability of success in sustaining a spending plan. Today, a 90% probability is considered by most planners as a good starting point for a retirement plan. However, that also means one out of ten plans will fail. As a retiree, are you willing to take that chance? In recent years, retirement income planning has evolved into a specialty in the financial advice arena. With close to 40 techniques identified and in use, it can be hard to know where or how to start. Coordinating Social Security, any pensions, IRAs, 401(k)s, Roths, taxable accounts, and other sources of income to most effectively and efficiently maintain your lifestyle takes expertise. Additionally, planning for taxes, inflation, healthcare, legacy, and loss of a spouse (just to name a few) can make the process daunting. A more palatable approach for most retirees is a ‘safety-first’ (insurance based) strategy. This strategy distinguishes between essential and discretionary expenses and then seeks a solution that practically eliminates the chances of failure for meeting essential expenses. To determine which approach may work best for you, you need an advisor who understands probability-based and safety-first strategies. Often, advisors heavily favor one or the other, depending on the licenses they hold and therefore, how they get paid. An appropriate analogy would be if you’re looking for a new car, you wouldn’t just go to the Ford dealership. The salesman will tell you Fords are the best (because that’s how he or she makes money). Additionally, your advisor needs to be product-agnostic. I have never seen one company’s product that is the best fit for everyone. If you need help in selecting a qualified advisor, email me and I’ll send you a handy guide at no cost or obligation. Retirement is often compared to climbing Mt Everest. The accumulation of assets and distribution of assets require two different skill sets. Just like climbing the mountain requires different skills than descending. In fact, more people die on the way down Mt Everest than die going up. Rarely is the status quo the best option when it comes to retirement income planning. Retirement income planning involves unique risks pre- retirees don’t experience. When it comes to your retirement, are you willing to risk your lifestyle by using the same rules you applied during your career? Or would you rather take advantage of the latest research to design an income plan to meet your unique needs?
Nick Naseman is the president of Iron Mountain Financial, a registered investment advisory firm located in Colorado Springs. He is a Retirement Income Certified Professional ® , and uses a holistic approach to retirement planning. He is also the co-founder of the Southern Colorado Senior Care Alliance, a group of professionals from various disciplines that provides seniors a single focus point to address some of the largest retirement risks.