The Retirement Income Challenge
For the new retiree, it’s a huge challenge to create a plan to transition a career’s worth of accumulations into a retirement full of income that needs to last until the end of life. There are so many factors to consider and every retiree’s situation is unique. So copying your retired neighbor’s plan won’t work. It all comes down to the question: How am I going to create an inflation-adjusted stream of income from my investments that will last for the rest of my life?
There are several retirement income strategies that are widely used today by people that hold themselves out as “retirement professionals”. Let me highlight just a few:
Relying on a Product, Not a Plan
Unfortunately, there are salespeople in every community that would have you think that buying an annuity is a good substitute for having a retirement income plan. An annuity’s promise of guaranteed income and protection from volatile markets is appealing to the new retiree. The problem is that these products – with their high fees and low returns – will never keep up with inflation. The retiree that gets talked into following the “annuity ‘IS’ my plan” method may shield themselves from temporary market swings, but they condemn themselves to permanent losses in purchasing power throughout retirement. That’s important because at just a 3% inflation rate, it’ll cost $2.40 in the 30th year of retirement to buy what a dollar bought in the first year.
Market Timing and Investment Picking
The perceived value of many in the investment industry is their claim to forecast the future and to pick “market-beating” investments. Unfortunately, the facts reveal that these “sophisticated underachievers” of the investment industry rarely beat market averages over time. Having a plan that’s designed to work through all the different stages of the economy is better than betting on the future direction of the markets – or the future success of a handful of investments.
Betting on Historical Averages
If equities have historically averaged 10% and bonds have averaged 5%, shouldn’t I be able to split my investments between these two investments and average a 7.5% return? Sorry, it doesn’t work that way! The problem lies in the fact that these long-term averages are derived from a series of annual returns, both higher and lower, that don’t resemble the long-term average. Even though it’s true that large US stocks have averaged around 10% over the long run, rarely has their annual return come close to 10% in a given year. Stocks have historically fluctuated on an annual basis from a high of 54% to a low of -43%.
Taking a systematic withdrawal based on long-term averages will devastate a retirement portfolio when the occasional down year (or even down decade) comes along.
Time Segmented Withdrawals
The time-segmented withdrawal strategy was inspired by a Nobel Prize-winning economist and we believe it’s the most reliable, inflation-beating income strategy available today. This methodology matches the retiree’s current investments with their future income needs – just as professional money managers of large pension plans match their investment portfolios with the future payouts to their participants. It only makes sense that individuals have their own retirement income managed the same way that managers of pensions have successfully managed pension cash flows of millions of participants for generations. Yes, adopting methodologies 1, 2, or 3 is easier for the local investment advisor to create and manage than a time-segmented income plan, and that’s why you haven’t heard of time-segmented income plans from other investment advisors. But, shouldn’t your future income be based on what’s in your best interests and not on what’s easiest or most lucrative for the investment advisor?
Peterson Wealth Advisors has taken the academically brilliant idea of time segmentation and transformed it into a practical model of investment management that we call “The Perennial Income Model™”. To get a better understanding of the Perennial Income Model™ you can request our book “Plan on Living, a Retirees Guide to Lasting Income and Enduring Wealth”. For specifics on how the Perennial income Model™ could be applied to your retirement income plan, schedule a complimentary consultation with one of our Certified Financial Planner™ professionals.
Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also literally wrote the book on retirement income, Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.