R101 #2 - Retirement Income “Personality”
What’s your approach to retirement income planning and why does it matter?
50 years ago, almost everyone had the same retirement income approach - work for a company for X number of years, retire and get a pension, and claim social security. (or I guess if I’m being accurate - most women had a husband who had this approach, but I digress)
Today, pensions are nearly extinct, life expectancy is much longer, many women go into retirement alone and retire sooner than they plan, and individuals are more responsible than ever for creating their own income stream in retirement.
There are a lot of different viewpoints out in the world about how to do this.
Let’s get one out of the way, right away - “passive income”. I feel like this is all the rage these days. Everyone wants to retire with passive income. It may mean different things to different people, but the fantasy is that you can do or make something that will create income throughout the rest of your life and it doesn’t require you to work for it. That’s my definition anyway.
Some people think investing in rental real estate creates passive income. I suppose it could end up that way if you hire a great management company that takes care of everything. In my mind, that’s not really “passive” though. I’m thinking more like you wrote a book 20 years ago that was a huge bestseller and you’re getting enough royalties every year to fund your retirement lifestyle. If you’ve done that, good for you! I’m not sure this blog will help you.
So let’s assume you don’t have a plethora of passive income.
You are likely thinking about/approaching/in retirement with a set of resources like a retirement account, a savings account, a home, maybe some other assets. The question is how you turn those assets into a stream of income you can use to pay your bills and fund your lifestyle for what may end up being 30+ years?
There’s not a right answer.
In fact, there are a spectrum of solutions. At one end of the spectrum, you could take all your assets and buy an annuity that would pay you a lifetime income. At the other end of the spectrum, you could take all your assets and invest them into a portfolio of diversified investments that are expected to grow for the rest of your life but with no guarantees.
Each one of these solutions has pros and cons. We’ll cover those later, but most people gravitate toward describing themselves as leaning toward one direction or the other.
So what’s your retirement income “personality”?
People who prefer safety, lack of volatility, want to set it and forget it, want to commit to a strategy, like the idea of annuities. People who are more comfortable with risk, want the possibility of leaving a large legacy, want to be able to take advantage of opportunities to enjoy life as they come up, like the idea of investing in a diversified portfolio.
It’s worth noting that the financial services industry does a good job at playing to the ends of the spectrum. It’s easy to find advisors who are convinced that their way is the right way (and the only way). If you lean heavily in one direction or the other, you may be perfectly well-served by one of those advisors.
It’s my belief that most retirement income plans belong somewhere along the spectrum for two reasons: 1) people don’t understand the risks of being at one end or the other, and 2) a combination of solutions can help them balance competing priorities throughout their retirement.
So, ask yourself which strategy you naturally lean toward - but be open to considering various solutions. Next, we’ll cover the risks that inform all of the retirement income decisions we need to make!
