As I write this article, there’s a “Bulletin” at the top of the page on MarketWatch: “Dow Industrials up more than 200 points.” This equates to a 1%-plus increase in the Dow Jones Industrial Average.
That’s great news for investors who aren’t shorting the market and who are chasing investment returns.
When you’re in the accumulation stage of life, investment returns are an important consideration for achieving various financial goals. Once you retire, however, you live on income, not investment returns. Unless you acknowledge this basic fact and change your mind-set from a return chaser to an income accumulator well before you plan to retire, you increase the risk of outliving your assets.
It isn’t easy to change old habits. When we’re in our 20s, 30s, and 40s, many of the goals we plan for require accumulation of a fixed amount that will be needed on a specified future date. The fixed amount will either be used all at once, e.g., down payment on a house, or over a certain number of years, e.g., college. In either case, the required amount can be projected using an appropriate assumed inflation rate.
The ability to achieve the foregoing types of goals is dependent upon three things: (a) amount of time between commitment to begin funding the goal and the future date when the targeted amount is needed, (b) rate of return needed to achieve the goal which can vary depending upon whether it’s funded by a lump sum, installment payments, or a combination of both, and (c) availability of funds required to achieve the goal.
The second item, rate of return, is critical. The greater the return, the less the amount of funds required to achieve a particular financial goal. In today’s low-interest rate environment with few opportunities available to capture return from fixed-income investments such as CD’s and bonds, investors are chasing returns more than at any other time in recent history.
For those of us in our 40s, 50s, and 60s who want to plan for retirement, we need to gradually shift our focus from investment returns to income. A constant flow of sustainable income that will cover our expenses is essential for minimizing the possibility of outliving our assets. Unlike asset accumulation goals that are attained with an inflated fixed amount that’s used all at once or over a defined number of years, retirement is an open-ended proposition with many unknown variables.
For starters, the retirement date, itself, can be a moving target. It’s often accelerated for health and other reasons; however, it’s also deferred in many cases. Second, we’re unable to plan for the number of years we’ll spend in retirement since we don’t know when we’re going to die. Finally, more so than at any other time in our lives, we need to acknowledge, and plan for, the potential for sizable one-time and continuing health-related expenses, with the likelihood of occurrence increasing at the end of our lives.
An open-ended income base, or floor, is required to match the open-ended and uncertain nature of retirement. Due to the length of time for which this income may be needed — 20, 30, or 40 years or more depending upon when we retire and how long we live — we need to acknowledge this when we’re in our 40s and begin shifting our fixation on investment returns to retirement income accumulation.
Trust me; making this transition is no easy task. In addition to a change in mind-set which is extremely difficult for most people, it requires a lot of complicated planning that, unlike any other type of financial planning, must quickly adapt to change. It needs to include strategies for dealing with income tax, conversion of assets into income, income gaps, Social Security, Medicare, long-term care, retirement housing options, insurance, debt, retirement plan distribution options, the aging process, estate planning, and other issues. Retirement income planning is a highly specialized discipline that requires specialized continuing training as well as experience and expertise in both financial and nonfinancial matters.
If you’re within 10 years of retirement, the next time that the Dow is up 200 points, ask yourself, “How will this affect the amount of my lifetime retirement income? If you’re unable to answer this question, you’re not alone.