Creating a Retirement Safety Net for More Financial Security
As far as financial security goes, when thinking of retirement, it’s important to consider the safety of your financial portfolio.
Do you have reliable income streams in place for retirement, whether for a set period or life? Is there enough liquidity in your assets to allow you to retire comfortably? Is enough of your money safe and put in secure, dependable places? Do you have an appropriate financial strategy for combating the the impact of inflation, high-ticket expenses like long-term care, and other costly retirement risks?
All of this brings us to a discussion on building a dependable safety net and how to make sure that you can answer these questions with confidence.
Close to Retirement? Now’s Time to Think about Safety
Earlier in life, many people focus on investment planning. They concentrate on investment returns and account values, among other things, so they can monitor investment performance.
Sure, investing strategy is a critical part of retirement planning. But as you inch closer to retirement, it becomes more important to keep what you already have. This is particularly true for retirement savers in their 50s and older. People falling into this age bracket are in the “retirement red zone,” or the 10-year span before their post-work life.
Now’s the right time to think about the unique risks of retirement – longevity, dependable income certainty, sharper effects of market declines, new costly healthcare needs, so on – and ways you will offset them. Neglecting to plan can mean setbacks in other areas: having to work longer, scaling back your lifestyle, not having the money to do the things you want, or settling for other compromised outcomes.
Yet many people aren’t prepared. Consider the following:
- Nearly 6 in 10 people haven’t calculated how much savings they will need for retirement.
- As much as 40% of baby boomers can run short of money in retirement, according to the Employee Benefit Research Institute.
- Just 12% of working Americans have taken steps toward preparing for healthcare costs in retirement, according to one survey.
One factor behind this may be due to a public shortfall in retirement knowledge. It’s important to understand that financial planning for retirement differs from that in earlier years, so let’s cover some of the fundamental distinctions.
Understanding the Financial Life-Cycle
For many people, financial planning can be a confusing process. But even if you have a financial advisor, it’s important to have an understanding of how things work. One of the basic concepts is knowing the financial life-cycle, which is made of three main stages: accumulation, preservation, and distribution.
On average, you begin the accumulation period in your 20s, when you get your first full-time job that allows you to set some money aside every month. You continue to accumulate wealth until you are in your 50s, when you begin to think more about your retirement planning. The idea is that this is your most productive period, when you can accumulate wealth, whether through savings, investment, and other smart financial strategies. If possible, you should be starting this process as early as possible, to make retirement planning that much easier later on.
Next, you get to the preservation stage. You may have used strategies like mutual funds and other high-risk investments during the accumulation period, but now it’s time to think about making your money safe for retirement. This means consideration of putting a proportion of your wealth into low-risk places to make sure that you don’t lose your money before you retire. And, depending on your risk tolerance, among other variables, maybe even so you have the safety net of guaranteed retirement income.
Last but not least comes distribution. Once you retire and no longer have a work income coming in, you will start using the money that you have accumulated. But this doesn’t mean just grabbing money out of a savings account, there are still financial strategies like annuities and other income vehicles to consider.
Keeping Your Money Safe for Retirement
Once you have reached the preservation stage, typically in your 50s, you goal will be to optimize your finances as well as keep your retirement funds safe and intact. Hopefully, by now you have accumulated some wealth and are looking to preserve it.
While you can still invest in some high-risk options, it’s generally recommended to keep much of your money safe. One way to start evaluating this is the guidelines of the Rule of 100. The goal is to make sure that you are not left with debt and lack of funds once you are no longer working.
Some safe investment options here include certificates of deposit, treasury securities, money market funds. Insurance options like annuities and life insurance may also have a place. When making a decision on the “safe money” portion of your portfolio, consider things like returns, guarantees, liquidity, and payout schemes that work best for your situation.
Guaranteed Strategies as a Retirement Safety Net
Let’s take a closer look at two of these options that are actually insurance products, rather than investments, fixed annuities and life insurance. To be clear, these are non-securities products.
In the case of annuities, an individual basically buys a contract with the insurance company, which outlines certain guarantees and obligations. Of course, there are considerations like interest rates and accumulation periods, but there are a few features that set fixed annuities apart from investments like CDs and savings accounts. One of these is the fact that annuities allow you tax-deferred savings.
They are considered a retirement product. If money is withdrawn after you turn 59.5, you are taxed within the bracket you are in at that time, not when you entered into the contract. Note withdrawals are subject to income taxation.
Additionally, some annuity schemes will allow you a lifetime income guarantee. In this case, the insurance company will pay you a fixed income monthly, quarterly or annually, based on the amount of money you paid into the contract and your life expectancy.
On the other hand, life insurance can be a way to both protect your family and accumulate wealth, while protecting your heirs from taxation. Rather than a lifetime income strategy, this is a wealth transfer option. An inheritance can be taxed heavily, especially for higher-value estates.
Life insurance allows wealth to grow tax-free as it gains interest. The transfer of wealth is also not taxed, since the policy owner can use an irrevocable trust life insurance policy, which prevents taxation upon transfer.
Financial planning is important throughout your life. Whether it’s for buying a house, getting your kids to college, or retirement, you need to be savvy to get the most “bang for your buck.” Financial professionals are key in helping you through the planning process, but getting your facts right yourself is also necessary, since after all, it’s your money!
While many people delay planning for retirement, the sooner you get started the better – it doesn’t matter whether you are still accumulating wealth, preserving it, or are already in the distribution part of the cycle. You should constantly be reviewing your portfolio to make sure that that the strategies are right for you today and in the future.