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®
Check out this article that appeared in the NY Times:
You may never need long term care, but if you do, you’ll know that you’re prepared for whatever life may bring.
Most of us realize the fact that it’s going to be more expensive for us to take care of ourselves down the road, and we need to budget accordingly. Prior to making any decisions, make sure you talk to your advisor or agent about how to handle any proposed increases or changes in policy structure.
Consider this: In a recent Financial Planning Association blog, Ira L. Barnett, LUTCVF, said, “There are two possible mistakes someone can make in deciding to obtain LTC insurance: 1. Buy the coverage and never have a claim (loss of premium paid, lost income potential, etc.). 2. Not buy the coverage and have a claim. Personally, mistake #1 is a lot more attractive!”
So when is the best time to buy long term care insurance?
Answer – Of course, most of us need to balance our investments and expenses carefully, and long term care insurance has to be factored in with many other responsibilities. But it is important to note that long term care insurance is generally less expensive for younger buyers than for older ones. In addition, it is smart to buy long term care insurance while you are relatively healthy. Unfortunately, once a person’s health declines, he or she may become ineligible for long term care insurance.
The simple answer is this: the right time to buy long term care insurance is when you can afford it, and before you need it. We can work with you to help create a policy that meets your needs and suits your budget. Call me for a FREE needs analysis and informational booklet, (808)216-4147.
From 1924 to 1930, Harry Heilmann worked in the off-baseball season as a licensed insurance agent. He was a star baseball player with the Detroit Tigers and was the Batting champion four times with them. As a result he became very good friends with Babe Ruth, and in fact sold one or more annuity policies to the Babe (and his girlfriend then wife Clara Mae Merritt Hodgson). The Babe had Heilmann come to New York and complete these annuity purchases in 1924 to 1930. the Babe and Mrs. Ruth subsequently started taking $1000 a month withdrawals from these accounts right after the Great Depression to maintain their lifestyle.
Purportedly there may have been more than one annuity contract and more than one annuity (life insurance) company used. These accounts were started with approx. $35,000; and $50,000. each beginning as early as 1924 and the last one in early 1929.
In retrospect, the “Babe” must have seemed like a financial mastermind back when it was all crashing around. His decision to transfer money from more “risky” investments into safer ones was sheer genius.