Today, we're bringing you a post from Tom Hegna, an economist, author, and retirement expert. He's been a popular industry speaker for many years, coaching other advisors on how to help their clients solve complex financial problems using easy-to-understand words, ideas and stories. Retirement planning, our focus topic this month, is one of his specialties.
The Optimal Retirement Plan
I assure you, there is only ONE optimal way to retire, and I’ll share it with you here. Keep this in mind though: I’m not going to offer you my “opinion.” Instead, I will lay out the mathematical, scientific, and economic evidence, that this is the optimal way to retire. With the ongoing Department of Labor ruling debates, nobody can agree on what is "best," but what optimal means is this. It will be the best more often than anything else will be the best, and it’ll never be the worst. So what do I think of when I think about #retirement? Four simple steps.
#ThursdayThoughts @IALCouncil When I think of retirement, I think of covering basic living expenses with guaranteed lifetime income, optimizing the rest of my portfolio to protect from inflation, having a plan for LTC, and transferring my wealth using permanent Life Insurance.— Tom Hegna (@TomHegnaSpeaks) January 18, 2018
Step 1: Cover your basic expenses with Guaranteed Lifetime Income
First, calculate how much money you need each month in retirement. Now subtract your Social Security and any pensions you may receive. The remainder is what needs to be covered by a lifetime income annuity. This is the only way to optimize income over the indefinite period of a human life because the mortality credits provide greater benefits the longer you live. This is how you completely remove longevity risk from your retirement plan. In fact, covering basic expenses with Guaranteed Lifetime Income actually takes five key risks off the table. It reduces market risk, withdrawal rate risk, and order of returns risk because of its structure. Plus, since it repeatedly grants you a paycheck, you are protected from deflation risk if prices go down during a recession or depression. There is a lot of value in a guaranteed paycheck for life, but a few key risks still remain.
Step 2: Optimize the rest of your portfolio to protect from inflation
One risk step one doesn’t reduce is that of inflation, and almost every retirement portfolio will be affected by it. Inflation can erode purchasing power over time which is extremely problematic for retirees who are on fixed incomes and depend on their savings. The solution will be difficult for some conservative investors. You will need to invest some of your money in inflation-sensitive investments like oil, gas, gold, real estate, stocks, and TIPS. Remember however, your basic expenses are covered by step one, so a lot of risks that cause conservative investors to object to this approach have already been reduced. Inflation may not be high right now, but it is possible we will see higher rates in the future. A different risk stands very likely to completely decimate your entire life’s work!
Step 3: You MUST have a plan for Long Term Care
No plan is complete without accounting for Long Term Care, and it is the one thing most people forget about that can completely wipe out their portfolio. Any plan is better than no plan. Even a box of cash stashed under your bed gets you started, but it is by no means enough. If you don’t think you’ll ever need Long Term Care, think again.
Step 4: Transfer wealth in the most efficient manner using permanent Life Insurance
Too many people try to use money to leave money. They end up with $200,000 of “just in case money” that is meant to go to the kids, but when they transfer that wealth, it is taxed heavily. They could have taken only about $50,000 to buy a $200,000 policy for the kids and then used the other $150,000 for their own retirement! Life insurance really can be purchased for pennies on the dollar, and if you want to learn how, read my other article here.
If you follow this basic blueprint and seek qualified advice when needed, you will not have the stress and frustrations many of your neighbors face. Don’t be left wondering what your retirement coulda, woulda, shoulda been. Start planning your optimal retirement by educating yourself on the basics. Then, share that knowledge with a financial professional.
Biography: Tom Hegna is an economist, author, and retirement expert. He has been an incredibly popular industry speaker for many years and is considered by many to be THE Retirement Income Expert!