You Need Two Kinds of Money in Retirement

  • February 22, 2016

Originally published in the News Star on Sunday, February 21, 2016.

Question: I should get about $2000 a month from Social Security when I retire, hopefully next year. I’ve got about $300,000 in my 401(k) plan. Everybody I talk to says I ought to be able to get $1000 a month off that. I’m just double checking with you, but it sounds to me like I’m all set.

Byron MooreAnswer: It comes as a shock to most folks entering retirement that they need two kinds of money in retirement.

Ever since the first day you showed up for work, the HR folks have been telling you to sock as much as you can into the company’s 401(k) retirement plan. In your mind, these were all “retirement funds” being saved for the purpose of…retirement.

So naturally we assume that all retirement money is the same – for retirement, right?

No. Sorry, that’s not correct.

Because in retirement you really need two kinds of money, or more technically correct, two kinds of capital.

The first is income capital. This is what you are referring to when you talk about getting $1000 per month out of your $300,000 401(k) plan. If you are planning to get $300,000 off your 401(k) plan, you’ll have to earn about 4% just to stay even. You can’t get 4% in a risk free environment these days, so that means wherever you try to get that 4%, there will be risk.

So your $300,000 will have a very important job – to make $1000 a month appear in your checking account each month.

But what happens if inflation heats back up, causing the spending power of your dollar to drop just 3% each year? That would mean that in 10 years your $1000 per month would spend like $750. After 20 years, it would spend like $550.

If you start pulling more and more out of your 401(k) plan to cover expenses, your money could run out before you do.

To make matters worse, the markets don’t care that you are retiring or that you need a nice, steady stream of income. The markets are open for one reason only – to prosecute the ruthless process of allocating capital to the most efficient place possible.

And that causes a lot of volatility. When you make steady, monthly withdrawals from an account that is fluctuating up and down, you can accelerate the process of running out of money – that’s not a guarantee, just a risk.

Finally, what happens if you get sick or disabled and need care over a long period of time? I’m no prophet, so my guess is only as good as someone else’s. But it appears to me we have entered a phase in this country where, more and more, health care is going to be rationed. Basic care will be offered, but choice will be limited. You could face a situation where you want a certain level of care, but Medicare simply will not pay for it. What if you had to use part of your retirement nest egg to pay for your own health care?

All of the above considerations are meant to jolt you into realizing that in retirement, you need two kinds of money – two kinds of capital.

You need “income capital,” whose sole purpose is to provide you with monthly income.

And you need “free capital,” which is your reserve, not called on to meet income needs of today, but the unforeseen needs of tomorrow.

No one can tell you exactly how much of either you will need.

But waking up to the reality of the need for both is a good place to start.

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Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at bmoore@argentadvisors.com. 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.