Through your working life, you make regular deposits to your retirement nest egg. But there comes a time where you stop making deposits and start making withdrawals.
Over your working life, the goal is to make deposits into your retirement nest egg. On that basis, the equation is quite simple.
If only it were that simple…
Once your paycheck stops, your income security stops. You know you need to rely on your retirement savings.
One of the biggest concerns of pre-retirees is how are they going to fund their income in retirement. Where is it going to come from and will it last sit at the top of worries as many approach their twilight years.
In the last post we discussed the 4% rule to ensure you had enough income coming through to fund all the fun things you are going to do in retirement.
That’s one approach.
Another approach is what we call the safety first approach to securing your retirement income.
In the previous post we discussed the 4% rule. This is largely based on withdrawing 4% a year from your investments. An investment portfolio based approach.
While a safety-first approach ignores any investment based approach to funding your retirement income. Instead the focus is through guaranteed sources to fund your retirement income.
The basis for this approach is to avoid variables like sequence of returns risk raining on your retirement party. The view that retirement is too important to leave it to chance.
Implementing the Safety-First Approach
You only have one shot to get it right. Otherwise it might be all over the red rover!
The priority is securing your regular retirement income to fund your retirement lifestyle until the day you end up in a box.
Let’s say you need $65,000 a year for the rest of your life to fund your comfortable lifestyle in retirement. If you were receiving any other income from other sources you would deduct that from your $65,000.
You would utilise financial products like annuities or various bonds to secure your base needs in retirement.
Then your focus might turn to building up an emergency fund. To cope with life’s shocks as they occur.
Once you have those two sorted, you may even work on creating a fund to cover the costs of other retirement experiences. Such as travel, change of cars, funding children’s weddings and anything else which will add a little spice to your retirement.
Benefits of the Safety-First Approach
One of the benefits of the safety-first approach is peace of mind. No longer do you need to be concerned with wild fluctuations in your super or investment portfolio accounts.
You’ll know exactly the level of income coming in each and every month.
It’s extremely easy to manage. Nothing to do except enjoy a regular deposit into your bank account each and every month for the rest of your life.
If you are able to cover your comfortable retirement lifestyle, any remaining monies can be invested in growth investments such as shares and property.
Disadvantages of the Safety-First Approach
The biggest disadvantage of such an approach is no flexibility. It assumes what you set out to do in retirement will be exactly the way it will be for the rest of your retirement years.
Experience tells us, that’s not the case. Life happens and changes happen. People change their minds a lot after they retire. Locking money in annuities can take away your power to pivot.
Investing in annuities in the current environment will mean locking in extremely low rates. In some cases below inflation rates.
Our insights on this approach
While such an approach caters for your need for certainty and safety. In the current environment you are going to have to lock in a significant amount of dough to fund your income for life.
We believe, particularly with clients we partner with. Remaining agile in your retirement is key.
Having an approach which has the ability to flex and contract as your life unfolds is critical to any successful retirement lifestyle.
Live your best life in retirement!
Glenn Doherty – CFP – Retirement Planning Specialist | Retirement Planning for Over 55’s powered by Life Centred Financial Planning