Originally published in the News Star and the Shreveport Times on Sunday, October 2, 2016.
Question: Like most people I’d like to retire some day. I work for myself. What kind of retirement plan should I be looking at?
Answer: Last week I suggested you not settle for a specific financial product just because it carries the right label.
Just because something is labeled a “retirement plan,” does not mean it’s the only way to fund your retirement, nor does it mean it’s really a plan. Don’t hear me saying to never use one. Just examine it as one of many potential tools you can use as you design your own retirement plan, strategy or structure.
You should think of a real retirement plan (strategy / structure) the way a coach thinks of a game plan – he probably has a highly choreographed action plan in case everything goes right. But there better also be plenty of contingencies in case of unexpected difficulties. What if a player gets injured? What if the other team’s defense is particularly effective against your offensive game plan? What if you have to play catch up late in the game?
In game planning, a football coach has to prepare his team for things going right during the game and for things going wrong.
In the financial game of life, preparation for both success and difficulty should also receive equal energy and emphasis.
What’s the secret to that kind of preparation for the unknown? Diversification.
But be careful if you think you are familiar with what “diversification” means. You’re probably going to have to expand your definition.
I contend that diversification is the core offering of any financial institution.
In the world of investing, most people know it’s a bad idea to invest all your money in a single company. Some have done it, but it doesn’t make it a good idea. The risks (if something goes wrong) are simply too great. So mutual funds offer investment diversification by owning shares of many different companies, hopefully across a broad spectrum of industries and business types.
In the world of banking, the offering is diversification of demand. Not all savers want access to their money at the same time, so banks can take most of the money deposited with them and loan it out to borrowers. This gives savers what they want (a safe place to keep their money) and borrowers what they want (access to those savings deposits).
In the world of risk management, insurance companies offer a combination of financial and actuarial diversification. Events whose frequency can be accurately predicted among a large group of people, but whose consequences would be devastating to any single individual, can be comfortably spread out over these large numbers. Thus the financial risks of dying too soon, getting too sick or living too long can be sufficiently reduced so as to no longer be a looming disaster for any single family.
I prefer the term “retirement structure” to “retirement plan.” And in my book, a sturdy retirement structure will allow you to maximize your enjoyment of your wealth while minimizing the risks to that wealth.
It should not be a single product, or even a collection of products. It should be a carefully orchestrated use of protection (insurance), savings (banks) and growth (mutual funds and other investment diversification vehicles), working synergistically.
Don’t settle for something labeled “retirement plan” when preparing for your retirement.
Work with a coach who can help you design your own retirement structure flexible enough to handle whatever circumstances come your way.
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