By Dennis Kagel, Chartered Financial Consultant
While working, most people contribute to a retirement plan and have a “growth” investment approach. In other words, they are directing most or all of the amount they are saving to options that provide the greatest potential reward. As the old axiom goes that we’ve all heard for years, “the greater the risk, the greater the potential reward.” (Side note— all too often people downplay or completely forget the word potential and its’ meaning.) It’s important to keep in mind that this does not mean a guaranteed reward, but rather a portfolio containing risk represents the potential for a reward. There is a HUGE difference!
It’s probably accurate to say that almost everyone, regardless of age, should have a portion of their portfolio at risk. As you’ve heard me say many times, in my professional opinion, “the number one mistake people make with their retirement accounts is that they stay too heavily invested in risk at too advanced an age.” I am certainly not against the market or risk, it’s just that experience has taught me that most people overdo it. This thought leads us to one of the rules that change the day we retire—the importance of a total portfolio review and being aware of how much we have at risk. For most people, this would involve an adjustment resulting in less risk and more allocated toward security and guarantees.
Even though “the rule of 100” is very simple and it’s been around for a long time, it’s still a great place to begin to come up with the right balance. I tend to fall on the side of being conservative and this rule fits perfectly into the investment model that we recommend. Simply subtract your age from 100 and that will give you the maximum you should have in risk at any given age. Therefore, a 65 year old should have no more than 35 percent of their total investable assets exposed to risk. Following this model, as one ages, there would be a smaller percentage allocated to risk. A 70 year old should have no more than 30 percent at risk, etc.
The day we retire, we no longer receive a regular paycheck from our employer. This leads us to another rule that changes on the day we retire. Long before that day arrives, it’s important to “fast forward” to the day we plan to retire and try to envision what one’s monthly income and expenses will look like. Will you have a pension? Will you be receiving Social Security? Will you have income from any other source such as a part-time job or farm income, etc.? And what will your fixed expenses look like? Let’s say for example that your total income is going to be $4,000 per month during retirement and you are going to have $5,000 per month in expenses. You must arrange to have at least another $1,000 per month coming from your retirement accounts that is guaranteed for life in order to “plug the gap” between your income and expenses. You must take longevity risk off the table! Longevity risk is the most serious and impactful of all the risks!
- The longer you live, the more likely it is you will run out of money.
- The longer you live, the more likely it is you will experience costly health problems.
- The longer you live, the more you will be dealing with the impact of inflation.
- The longer you live, the greater the likelihood of increased future taxes.
There are plans available today that allow one to convert an appropriate portion of their retirement nest egg into a “Paycheck For Life.” You can turn a portion of your total investable assets into an income stream that will pay you a guaranteed income for life. By the way, here’s a hint: stocks cannot do this, mutual funds cannot do this, bonds cannot do this, and bank CD’s cannot do this. It’s never too soon to visualize what things are likely to look like financially the day you retire and to be fully informed about your options for compensating for any potential retirement income gaps.
Dennis Kagel is the president of Dennis Kagel Financial Services located at 321 Susan Drive, Suite A in Normal. You may call 309-454-9171 to schedule a no-cost and no-obligation visit to learn more about your financial options.
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