Wrong Answers to Right Questions
By Steve Gaito
The right answer to the wrong question is still the wrong answer.
I have been helping people plan for and implement retirement plans for over 28 years. The one question I get is how much is enough to retire. Large investment companies want you to believe that there is a magic number of assets that will be enough for retirement. The problem is that there are too many variables in that equation.
You are subject to changing tax rates, increased costs to your Medicare premiums if your income rises, and the volatility of the market. When I started in this business in 1993 fixed interest rates were between 12% and 14%. Creating an income plan was easy. No volatility and great income were just what everyone would want. In today’s market fixed income rates are between 1% to 2%. To put this into perspective consider the income under these two scenarios. If you have a retirement account IRA or 401(k) plan with $500,000 saved. Under the higher interest rates, you would have had between $60,000 to $70,000 of income before taxes. Today you are lucky to get $10,000 from the same amount of money. This creates what is known as the “Saver’s Dilemma”.
You must take more risks to get a higher return. This is exactly what most want to avoid in retirement. So, what is your option? The right question is how much income do you need to live? You have lived your entire life with a paycheck coming in at regular intervals and you were able to save, put food on the table, provide for the education of your kids and take a vacation. It worked well.
The right answer to the right question is how you replace your income. This is where it can become a personal preference with future goals. In a perfect world, you would have a pension that provided income to your last breath. Many people have this in Social Security benefits. So, what do for the rest of the income you need? If there is no income need for the spouse, then a fixed lifetime annuity may work. The challenge with fixed annuities is that they have the same challenge of bank interest rates and may be too low to meet your needs. This brings us back to Saver’s Dilemma. Fortunately, there are some other options.
The introduction of Equity Index products both life and annuity have changed the equation for many in retirement. They are an interest crediting option that gives you some of the upsides of the market without the downside risk. What this effectively does is reduce the standard deviation of the index. When you remove the chance of loss you don’t have to have as many upside gains to meet your need. Now it is important to remember that this is not meant to be a one size fits all solution. It is to be used as part of a comprehensive plan that takes into account taxes and estate needs. What these index products do provide is the opportunity for higher interest rates which is what most people are looking for in retirement. If you can get the same return with a lower standard deviation, it is a much better choice in retirement.
I hope this helps you ask the right question about your retirement and if you have questions please come to my office or check out my website www.retirerm.com. You can also schedule your free initial consultation.
Steve is the owner of Faith-Based Health Care and Retirement Resource Management. He is a National Speaker on the topic of Social Security optimization, quoted in national publications like Money Magazine, US News and World Reports, and Fox Business. Steve loves to educate and teach on financial topics like taxation of retirement accounts, long term care, healthcare, and efficient savings plans for small businesses. He has provided financial planning for missionaries through the International Mission Board. You can find Steve at 68 South Main St. in Marion, NC by calling 828-559-0299, email firstname.lastname@example.org or visit his website at www.faithbasedhc.com.
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