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WHY EVERYTHING YOU’RE TOLD ABOUT PLANNING RETIREMENT GOALS IS WRONG: A STRANGE CASE FOR HAVING NO NEST EGG
I know that sounds like a ridiculous case to argue, but before you disregard my words as nonsense let me paint a picture for you with two very different scenarios.
Scenario 1: You’re of working age earning an income in excess of your bills. This income is a constant, something guaranteed to come in monthly. This is a conceptual exercise so just picture about what you make and spend each month, what’s your break even plus a decent amount extra for you to set aside or use as you choose. In this scenario you’re also properly covered and insured for most emergencies’ life throws your way - with the exception of your savings account. Your savings is quite nominal to nonexistent.
Scenario 2: You’re the same age and ability as scenario 1, but with an opposite situation. You’re not working, you have bills to pay, and not properly insured against emergencies with the exception of your savings account. Quite a large savings in fact, your “nest egg” if you will.
Given these two scenarios which has better longevity?
Well, with money comes opportunity, and with that large savings you can invest right? Use your money to make money! Invest correctly you may never need to work again. Maybe that savings lasts you a year of bills, maybe 2, maybe life! But with investing there are no guarantees so what happens if you choose poorly? What happens if the world doesn’t cooperate with your plans? What if that 2 years’ worth of money to pay bills becomes 2 days’ worth to get by on? Now what do you do?
What about scenario 1 for longevity? No current savings, but you have money coming in. You have more coming in then going out, what does that mean for your savings? It means your savings grows. If you a large savings, but not enough income you eventually spend down your savings. However, if you have excess income and no savings, then you build up your savings?
Given these two scenarios, which would you rather find yourself in? Do you gamble on what you may or may not have moving forward? Or do take the income, cover your bills, and eventually build your savings up to levels discussed in scenario 1 and invest from there?
If you think the way I do then you’re leaning towards scenario 1. Why gamble on your livelihood?
In these scenarios you’re working, but now imagine them in retirement. If scenario 1 makes sense to you while working why should that be any different in retirement. Why is having that nest egg so important? Wouldn’t having excess income be more valuable in retirement for the same reasons it is while you’re working? Why does your strategy for your working career differ so drastically from what you’re told your retirement goals should be?
Below are two articles from well-respected companies in the financial field. Both have articles on their version of retirement rules and they’re not far off from what I see in most articles. The message tends to be the same and always focuses on the same critical component, which is what can I withdraw without running out of money?
My concern however, is that they always approach this question from the wrong angle. How can any article, any advisor, any pamphlet on retirement answer this question when what they all tell you to (or assuming you will be invested in) is dynamic and not static? How can you plan a retirement on any withdraw rate when you don’t know when you’ll die and your investment can be cut in half at any point? How exactly do with solve this problem of supplemental income withdraw without investing in the stock market like all these articles allude to?
The short answer is pensions. Pensions are meant to be lifetime income and if that income is more than your living expenses then the rest is play money. Money to spend enjoying retirement. Well, you may say to yourself, pensions sound great, but unless I can time travel back to the 50’s or pick up a government job a pension is never going to happen for me. In a sense, you are correct, pensions from employers are definitely a thing of the past, but what you’re not told is you can self-fund your own pension.
What a pension is, is an annuity. What an annuity is, is “a fixed amount of money paid to somebody each year, usually for the rest of their life.”** If you’ve been told annuities are terrible and you should never own one, please consider whether or not you think pensions are a positive for retirement? Consider whether or not you plan on taking social security in retirement? Pensions and social security are just annuities by a different name.
If you don’t understand why you would be told annuities are terrible even though now, they seem like a good idea read our blog on that topic below and get the full story…
For more information on pension planning or any other financial topics such as this, give call us at (623) 523-0444 or email us at Anthony@RotchfordFinancial.com or JR@RotchfordFinancial.com