Quarterly Letter Excerpt: Planners Corner

Retirement planning in America is constantly transforming. The widely accepted concept that everyone can retire is only a few generations old. In such a rapidly changing world, how we achieve such a feat will also continue to evolve, which means that traditional approaches to securing retirement income need to be revised. Longevity is on the rise, traditional pensions (defined benefit plans) are becoming relics of the past, and the onus of retirement planning now squarely rests on the individual.

Given the statistical likelihood of living well into our 90s, especially for non-smokers and those of higher socioeconomic status, the necessity for robust and foolproof retirement planning strategies has never been more apparent. This reality drives us to rethink and innovate in how we protect your financial future.

When creating comprehensive retirement plans for clients, it is important to identify and address some of the potential hurdles future retirees face. I often return to a list that author Larry Swedroe coined as the “Five Horsemen of the Retirement Apocalypse.” One of these five included “historically low bond yields,” which is no longer as relevant today, but I still find this list useful when trying to understand how to best plan for our clients’ futures. So, the following Four Horsemen remain top of mind for retirement planning in 2024:

  • Historically High Equity Valuations: With the U.S. stock market’s long bull run, it is wise to adjust expectations and prepare for potential downturns in equity investments.

  • Increased Longevity: As life expectancy rises, retirement planning must account for potentially longer retirement periods, necessitating a portfolio that can last 30+ years.

  • Long-Term Care Costs: With the likelihood of needing long-term care increasing with age, planning for these costs is essential to avoid financial burden and ensure quality of life.

  • Social Security and Medicare Benefits: There’s a chance that benefits could be reduced or taxes might go up to support these programs. We need to plan for multiple outcomes.

All we have to do is look at annuity sales in 2023 to see that consumers and advisors alike are turning to insurance contracts for peace of mind in the face of these headwinds. In ways, it’s unfortunate to see a record 25% increase in year-over-year annuity sales, as often, it’s primarily the agents who benefit from these products. Most annuity sales tactics use the same general concerns discussed above to incite fear and force quick action at the client’s own peril. My general thought process for insurance and annuities is straightforward: insurance is a great risk transfer tool but an expensive way to invest. If an annuity contract cannot be clearly explained, including all fees and market-based outcomes, I’m not interested.

A critical, yet often missed, step in sound financial planning is customizing withdrawal strategies to suit individual needs. This should usually be the first move in crafting a tailored retirement income strategy. When done in concert with a comprehensive financial plan, customized retirement withdrawal strategies can provide greater financial security because they allow for flexibility. None of us know what the future holds and unlike an annuity contract that locks you into a particular set of terms with possible penalties for making changes, customized income strategies allow you to make adjustments at the margins or pivot when necessary as your retirement years unfold.

As we consider the often jarring transition from saving to spending, it is essential to understand the various withdrawal strategies for portfolio assets available in retirement, which broadly fall into four categories:

  • Constant-Dollar Withdrawal: Start with a fixed percentage, then adjust annually for inflation. It can suit those needing a consistent income to cover fixed expenses.
  • Constant-Percentage Withdrawal: Withdraw a consistent percentage of your portfolio each year. Nice for those with flexible spending needs and lower fixed costs.
  • Variable-Percentage Withdrawal: The withdrawal percentage adjusts based on your portfolio’s annual value. Suitable for flexible spenders without the aim to leave a significant inheritance.
  • Spend Only the Income: This approach only spends dividends and interest, preserving the principal. It suits individuals with low expenses compared to their portfolio size or those wishing to use their current asset base for legacy planning.

Note that none of these strategies are a set-it-and-forget-it approach. They are part of a constant discussion about how we can help you most efficiently and comfortably spend the money you have worked so hard to earn.

Morgan Housel’s “The Psychology of Money” emphasizes the personal nature of financial decisions, reminding us of the wide variance in how people view and manage money. This diversity points to the absence of a one-size-fits-all approach to retirement planning. The goal is to find a strategy that aligns with your needs, ensures stability, and adapts to life’s uncertainties.

As your financial planners, we’re dedicated to navigating the complex landscape of retirement planning with you. If you have friends or family who require sound advice and a comprehensive review of retirement income planning options, please reach out and refer them to our team. Our goal is to ensure that our client’s retirement strategies are not only robust and tailored to their needs but also flexible and ready to adjust to the constantly evolving financial world.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.