QUESTION: My husband and I are getting serious about planning for the future. We want to save for retirement, but we are unsure exactly how to do that. I don’t think just putting everything in a retirement plan is a good idea, because we might need to get to the money before then. But if not there, where should we put it?
ANSWER: You may be starting with the wrong question.
Make sure you get a clear idea of what you are trying to accomplish (your goal), then the question of where to put your money (your method) gets easier to answer.
I find most people start out with the unspoken (and largely unexamined) assumption that the goal is to have as large a nest egg as possible. I call this the Accumulation Theory…the goal is (obviously!) to accumulate as much as possible by the time you retire.
But is it?
Suppose you had two choices for a retirement scenario: the first is that you owned $50,000,000 worth of real estate. The second is that you own $500,000 worth of real estate. You pick the first, right?
Well, what if the $50,000,000 of real estate is worth so much because it is located adjacent to a national forest and the government says you can’t build anything on the land that would pay you a rental income. So you are asset rich, but income poor.
Further, supposed the $500,000 worth of real estate (the 2nd option, remember), paid you a monthly rental income of $25,000 (a month!!!). Hey, it’s my example…I can make it as whacky as I want.
Neither of those extremes is likely – both would be nearly impossible. But my point is that having an asset (or assets) of a certain market value is not enough – you’ve got to have a plan for turning that asset into an income stream without ultimately cannibalizing the asset itself.
Fortunately, you can buy dividend paying stocks, interest bearing bonds, rent producing real estate and private businesses that make (and distribute) profits.
So then, is the goal to have as many income-producing assets as possible? Well, you’re getting warmer, but you’re not there yet.
Two things generally happen as we move through retirement – our capacity for complexity and risk diminishes and the likelihood of an expensive life event occurring increases. Both of these realities call for an optimization of benefits available in retirement.
Benefits, as I use the term, are third party payments made on our behalf to fund life events beyond our control. This often involves insurance, but may also include pensions and retirement benefits. We essentially purchase (at a deep discount) the payment of large expenses in the event these expenses occur. These could be medical expenses, long-term care expenses or longevity (living too long!) expenses.
What’s needed is a simple balance of cash flow (retirement income) and benefits (so we don’t have to use our precious cash flow to pay for catastrophes).
To provide cash flow, look at maximizing Social Security benefits (by waiting as long as possible to take them), required minimum distributions from IRAs, 401Ks and other retirement accounts (beginning at age 70 ½) and guaranteed income annuities to provide a base of income. Beyond that, income from an income-oriented investment portfolio can add additional income, but take care to properly diversify and demand quality.
To provide benefits, look for creative combinations of life insurance, long-term care insurance and supplemental benefit insurance to pay for medical costs not covered by Medicare.
Remember – keep it simple and keep it safe. And I think you’ll like your results.
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Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.