Category: retirement distribution planning

Retirement Liquidity: The Mango Tree

My-sweet-mango-tree-MyanmarDon’t tie-up all of your assets, but don’t have them all liquid either…

Having your assets liquid may feel good because it’s accessible. But at the same time, let’s consider the big, longevity picture. We American’s are all living longer than ever. And when it comes to generating income during retirement, having your assets liquid at all times may actually increase the risk of your assets not lasting for your lifetime.

Your Retirement Mango Tree

Think of all of your assets as one mango tree with branches (your principal) producing enough mangos (income) you need to live comfortably during retirement. In the beginning, you may think there’s no harm chopping off a branch or two (liquidity) for firewood due to the overall size of the tree. But, when doing this you are “double counting” the asset for being equal to meeting two needs. The number of mangos produced would be lower and if you keep chopping off branches, there may come a point when your tree cannot produce enough mangos and cannot grow new branches, ultimately reducing the life of your tree. No more tree, no more mangos.

There are many decisions you will need to make in your life as you enter into retirement. One of the many financial decisions is what to do with the assets you had accumulated for retirement. Your paycheck is ending. It’s up to you to make a new one to last for your lifetime with your assets.

Retirement at Risk

After the market crash of 2008, percentage of American households who are “at risk” at age 65 increased to 51% (2009) from 43% (2004) according to the National Retirement Risk Index.1

 

Now, think of your assets as being multiple mango trees…

You fence off and give up your access (liquidity) to some trees so that these trees are only there to produce enough mangos to cover your necessary expenses. The remaining trees are for producing mangos and firewood for when you need it.

Under this approach, you have established sources for solely producing income and you also have sources for your liquidity needs.

Create one mango tree or multiple mango trees?

Your view about retirement should be long-term because it is unknown as to how long your retirement years will be; therefore, you should explore financial products that can provide income for your lifetime and that of your spouse’s lifetime. One of the main reasons that you save for retirement is to produce income (mangos) for your necessary expenditures, like paying your mortgage/rent, food and utilities, so you can live comfortably during these years. In addition, a portion of your income should be independent from and not reliant on market performance. Finishing confident is just as important as beginning confident.

Earlier the Better: Create Your Plan Today

Here are some action steps you can take today to better prepare for retirement:

  • Understand how your lifetime sources of income work, like Social Security, and explore possible ways to increase these sources.
  • Compare your retirement income with the total amount of your expenses — necessary expenses and comfort-living expenses — to see if you have a retirement income gap.
  • Purchase financial products that can provide guaranteed payments for life or for the life of the surviving spouse, and that can provide protection for unexpected events.
  • Follow a distribution/withdrawal plan by accessing pools of assets at certain points in time during retirement. This can help you lengthen the life of your assets, gain the potential benefit of compounding growth and systematically increase your retirement income when you need it most.
  • Work with a financial professional to fully explore your options for developing your income plan for retirement.

1The National Retirement Risk Index measures the amount of American households who are at risk of not being able to support their pre-retirement lifestyle during retirement. This index is calculated by The Center of Retirement Research at Boston College and the report can be found at http://www.crr.bc.edu®

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Income Planning: Don’t Eat Your Seed Corn

Growing up on Maui, we drove by several acres of corn fields every day to get to school in town. I always wondered why they chose to grow corn amidst cane fields outside of Kihei. It turns out that the agricultural biotech industry, which includes seed corn research companies like the huge Monsanto Corporation, develop new varieties of corn on the Mainland in the summer and sent it to Maui for multiplication during our mild winter. That lets the seed companies bring new cultivars to market a season earlier. As a Maui boy, all I knew was that we never ate that corn. They were growing seed corn, and unbeknownst to us we were learning a valuable lesson in practical economics.

My dad once told me when I was younger that seed corn is what farmers need to plant now to get a crop to live on in the future. If you eat the seed corn today, it may be tasty and you may live well in the short-term, but you could have some major problems down the road. It’s the origin of an old country saying that’s full of wisdom: “Don’t eat your seed corn.”

The analogy applies to individuals and businesses. One of the purposes of strategic planning is to help ensure that businesses invest their capital for tomorrow. The same holds true for individuals and families, as it relates to retirement income planning. The more seeds you plant today, the better your chances will be of having enough in the future.

Some say it’s the main difference between the rich and poor in America—the ability to delay gratification in anticipation of greater rewards in the future. And because many Americans have been feeding at the trough—stuffing their faces with seed corn—now there’s nothing left.

This is where “retirement income planning” comes into play. If all you do is consume what has already been reaped from prior investments, eventually you will run out of funds. Of course, if you’re a “pensioner”—workers having traditional pension plans through their employers—this doesn’t apply to you as much. I’m directing this article toward those individuals who are relying on personal savings, IRA’s or 401(k) plans to fund their retirement.

It’s not an easy pill to swallow. After spending a career accumulating money for retirement, the idea of cashing in those investments to create income can bring on anxiety for many people. Their common fear is running out of money when they’re too old to do anything about it.

In fact, according to a new poll by Allianz Life Insurance Co. of North America, of people ages 44 to 75, more than three in five (61 percent) said they fear depleting their assets more than they fear dying.

Fortunately, there’s a financial tool that can help. To learn more about how it can boost your retirement security by transforming a portion of your savings into income that’s guaranteed for life, please feel free to contact me at mgarrettwheeler@gmail.com.

Before Retiring, Consider Ric Edelman’s Top 10 List

PBS_RYR_Ric_and_LynLast night on PBS Hawaii, I watched as Ric Edelman, a #1 New York Times best-selling author, shared key points on what we all need to know right now to, as he puts it, “RESCUE YOUR RETIREMENT”. Edelman points out that, “if you’re like millions of other Americans, you could be making costly mistakes with your investment and retirement accounts that interfere with your efforts to provide yourself and your family with financial security.” This television special, exclusive to PBS, highlighted some of the big mistakes investors make, and explores fascinating insight into the science of financial decision making.

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