Is your retirement plan fragile or agile? pt. 2

The following column was published in The News Star on Saturday, August 23, 2014.

Question: I want to get things lined up for my retirement. I’m close enough where I don’t think I’ll be taking any big risks in my retirement plan. But how should I invest my money in my retirement plan once I do retire? And how do I get money out?

Answer: Like most questions I answer, I begin with “get a plan.” In this case, a retirement income plan.

Last week, we saw that the purpose of a retirement income plan is to put together the jigsaw puzzle of your available resources, your needs and the financial industry’s products and services so as to maximize your income and minimize your risk.

Your available resources are made up of all the money you’ve saved or otherwise acquired (inheritance, etc.) up till now. Your needs are actually a combination of your needs and wants. The less money you have, the fewer wants you’ll be able to afford in retirement.

And finally, the products and services offered by the financial industry are the raw materials with which you will create your retirement income engine.

Consider Cliff and Clair. After raising five children, this doctor and attorney pair are ready for retirement. They’ve lived a comfortable lifestyle and would like that to continue but realize they may have to make adjustments.

Social Security. Both spouses worked and earned a healthy income, so their Social Security checks will reflect that at about $2000 per month each. Neither of them worked for an employer that offered a retirement pension plan, so they can’t count on any other fixed or guaranteed income, unless they do something to create it.

Guaranteed income annuity. Both Cliff and Clair agree that a certain amount of income over and above what they can count on from Social Security would be nice. So to create another $3000 of monthly income that will last as long as either of them is alive, they work with an experienced, licensed insurance agent to secure a guaranteed income annuity. For a specified lump sum of money, an insurance company will guarantee a specific monthly income amount as long as either spouse lives, even past 100. The downside is that you give up the lump sum of money. The upside is that you can never outlive your income. Cliff and Clair wanted some of that.

So now, Cliff and Clair have $7000 of monthly retirement income that they know they can count on. But what if they want more monthly income? Where to get that?

Interest and dividend income. Bank accounts and bonds pay interest to their owners. Bank interest rates fluctuate, but a bond’s rate is fixed for the term of the bond. Bonds can be aggregated into mutual funds and thus experience rate fluctuation as well. Some stocks pay dividends, which are cash distributions of profits paid out to the shareholders. Cliff and Clair aren’t too impressed with today’s interest rates (or lack thereof).

Capital gain or appreciation (growth). The value of a stock or bond may rise or fall depending on a myriad of factors. Cliff and Clair know they can harvest some of the growth off their individual stocks and/or mutual funds when times are good. But as they’ve learned through the years, times are not always good.

Safe withdrawal rate. These days a popular method of income production involves a calculated guess at how much one can safely withdraw monthly from a balanced portfolio of stocks and bonds. The balancing act comes when trying to be consistent and safe, while providing adequate income. Most experts these days say withdrawing about 3% annually is about right. Much more and you run the risk of running out of money during retirement.

So, which approach is best: relying on guaranteed, fixed income like Social Security, using some of your money to buy a guaranteed income annuity, counting on the interest and dividends off bonds and stocks, harvesting the hoped for growth in the stock market or guessing correctly a safe withdrawal rate?

As you might suspect, the proper balance of all of the above is different for each person or couple. Relying too much on one product or another may make your retirement fragile,

Employing a plan, on the other hand, can help you stay agile, able to navigate the inevitable changes that will come during retirement.

So which will it be, fragile or agile?

Get a plan.

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.