Accumulate Income, Not Assets, for Retirement

Accumulate Income, Not Assets, for Retirement

Voiced by Amazon Polly

The personal savings rate in the United States has never been exemplary, averaging 6.83 percent from 1959 through 2013 as reported by the U.S. Bureau of Economic Analysis. Although we’re encouraged to save from an early age, it’s difficult for people to accumulate funds in a financial institution account without taking withdrawals from the account unless the reason for savings is to purchase a tangible product.

As an example, unless we receive a sizeable gift or inheritance, the down payment on our first house doesn’t fall from the sky. Most people in this situation need to diligently save a portion of each paycheck in savings and/or investment accounts to accumulate the necessary funds for this goal.

A tangible product such as a house is much easier to plan and save for than a more nebulous, loftier goal such as retirement. With the down payment on a house, the target is a fixed dollar lump sum in a defined number of years that’s typically within ten years at the most of the savings starting date. Once you accumulate the desired lump sum, it’s just a matter of time until you sign the reams of paperwork to purchase, and move into, your first house.

Saving for retirement is a totally different, and for most people, daunting challenge. For starters, unlike saving for the down payment on a first house, retirement isn’t a tangible goal. Contrary to the message in the popular 2010 ING commercial, “What’s Your Number?,” accumulation of a fixed dollar amount at an unspecified date isn’t the way that successful retirement planning is practiced today.

Although it’s easier for people to relate to, and plan for, saving a fixed dollar amount at a specified date, this way of thinking cannot, and shouldn’t be, applied to retirement planning. Without listing them all which is beyond the scope of this post, there are simply too many variables, many of which are beyond our control, when it comes to retirement planning to apply this type of approach. Suffice it to say that the potential for spending two to three dozen or more years in retirement without any predictable end date doesn’t lend itself to a traditional asset planning methodology.

Recognizing this fact and acknowledging that the financial side of retirement is expense-driven, retirement income planning was born. Rather than trying to accumulate a single lump sum that we don’t have a clue whether it will meet our financial needs for the duration of retirement, we need to accumulate streams of income that will match our projected expenses during various stages of retirement.

Since retirement isn’t a single event and is instead open-ended when it comes to duration, the income streams need to last for our lifetime. Like it or not, assuming that you don’t want to risk running out of money, lifetime needs to include the possibility that we may live to age 90 or longer.

Although it’s not simple due to the numerous interactive assumptions that must be made, it’s easier and more appealing to calculate individual years of projected expenses and match them up with projected income streams vs. simply saving a percentage of one’s income each year and not knowing if the resulting savings will meet our retirement needs.

Recognizing the foregoing facts, it should be easy to understand that saving 6.83% of your income in the absence of a sizeable inheritance isn’t going to be sufficient in most cases for funding all of our various financial goals, including retirement, especially if the start date for funding the latter goal is deferred to age 50 or later.

Knowing that when it comes to retirement planning you need to replace your employment income with other income that will pay for your future inflation-adjusted expenses for an indeterminable period of time may just motivate you to save a little more and start saving a little sooner than you would otherwise do.

5020 Campus Drive
Newport Beach, CA 92660-2120
Phone: (949) 251-0910 or Toll Free: Plan2Retire (844-752-6273)


Advisory services offered through Retirement Income Center, a Registered Investment Advisor

©2020 Robert Klein and Retirement Income Center. All rights reserved.