Going from a saver in the accumulation phase to a spender in the spending phase of your financial life means that you will not only have to keep a close eye on your investments, expenses and taxes, but also create your own “paycheck “. .”
This salary may result from the fact that some retirees live on interest or dividends from investments. Others may prefer more predictable sources of income, including pensions and social security. These “safe money” assets can help give you peace of mind and possibly cover your basic living expenses.
Consolidate your emergency savings
It’s crucial to take a systematic approach to the problem of how best to spend your money in retirement. You need to make sure you have enough money to cover unexpected expenses for at least a year. Suppose you are worried about having to sell investments in a bear market to cover emergencies. You may want to discuss rebalancing your portfolio with your advisor, perhaps using more liquid assets.
Include predictable income streams, using annuities and life insurance
Most planners understand, at least on a fundamental level, the power of annuities to help their clients avoid running out of money when they retire. After all, almost all financial services companies offer annuity products, and they have done so for many years. Modern retirement research has produced volumes of data-based reports confirming the value of an annuity in a retirement portfolio. Life insurance and annuities may be suitable for retirees who want capital protection, a predictable stream of income for life, long-term care options, or who want to leave a legacy for a family member.
Despite the positive data surrounding annuities, many advisors are hesitant to offer them to their clients. This reluctance is often because they think customers who have heard negative things about the product in the media or online will be reluctant.
Many popular financial entertainers such as Dave Ramsey have been outspoken against annuities and continue to spread myths and misconceptions to their viewers.
However, ongoing changes to the structure of pension plans and the funding of employer-sponsored plans have caused more and more people to tap more into safe money and income products to build their retirement plans.
Since 1974, the traditional defined benefit (DB) plan, which provided retirees with benefits based on final salary and years of service, has disappeared from the private sector. It is replaced by the direct contribution scheme in which employees and their employer regularly contribute to accounts in the name of the employee. Direct contribution schemes benefit companies by reducing their expenses. But they place the burden of retirement success on the shoulders of the individual. If you participate in a workplace plan, longevity risk and performance risk pass to you. Standard direct contribution plans do not guarantee that your account will provide income for life and running out before your death is always a distinct possibility.
That’s why most retiree portfolios will benefit from strategically designed insurance and annuity products. Strategically designed life insurance is another way to create more predictable and tax-efficient income streams. Properly structured, life insurance offers more liquidity, use and control of your money than many other assets.
Brad Rhodes is a Lexington-based financial planner. He can be reached at 336-746-4729.
His column is made available by Syndicated Columnists.