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.


Crafting a Foundation for Lasting Income in Retirement 

“Consider it as sculpting a financial architecture…”

Embarking on the journey of retirement is akin to laying the foundation for a fresh chapter in your financial life, where the structure of your income becomes pivotal. In this exploration, we’ll delve into the art of income planning beyond retirement—a strategic composition not just to make your money last but to construct a financial foundation for a lifetime. Consider it as sculpting a financial architecture to support your lifestyle and aspirations. 

Understanding the Blueprint of Retirement Income: 

“The initial step is to decipher the blueprint of your income sources.”

In the realm of retirement income planning, the initial step is to decipher the blueprint of your income sources. Begin by evaluating and documenting your existing and potential retirement income streams, including pensions, Social Security benefits, and withdrawals from your investment portfolio. This exercise transforms your blueprint from an idea into a written account, outlining the contours of your retirement foundation. 

Key Considerations: 

  • Pensions and Social Security: Scrutinize the reliability and sustainability of these income sources, weighing factors like lump-sum versus annuity payout for pensions and potential changes in Social Security regulations or benefit age. 
  • Investment Portfolio: Consider how your investments will contribute to your retirement income. Evaluate the risk profile of your current portfolio and its role in shaping your overall financial structure. 

Building a Structure of Sustainable Income: 

“This exercise transforms your blueprint from an idea into a written account, outlining the contours of your retirement foundation.”

Once the blueprint is clear, the subsequent step is to construct a plan for sustainable income. During this phase, you are crafting a framework for your retirement income that not only covers your basic needs but also adapts to the dynamic nature of your financial landscape. 

Strategies to Consider: 

  • Systematic Withdrawals: Establish a plan for systematic withdrawals from your investment portfolio, ensuring a steady income flow. There are various withdrawal strategies worth considering; this one proves relatively easy to implement. 
  • Tax-Efficient Strategies: Explore tax-efficient methods to optimize your income. This may involve considering Roth conversions, strategic charitable giving, or other approaches to minimize tax implications. Remember that reducing your total lifetime tax payments holds more impact for your financial plan than merely reducing your current year tax liability. 

Fine-Tuning for Resilience: 

“During this phase, you are crafting a framework for your retirement income…”

Just as architects prioritize resilience in building design, your retirement income structure needs fine-tuning for resilience. Integrate risk management strategies to guard against unforeseen challenges and disruptions. The focus should be on the goals you’ve defined for your retirement, without succumbing to the uncertainties of the world around you. 

Resilience Strategies: 

  • Emergency Fund: Maintain an emergency fund to cover unexpected expenses and ensure a buffer against financial uncertainties. 
  • Insurance: Review insurance strategies to ensure alignment with your needs, providing a safety net for unexpected healthcare or other significant expenses you prefer not to bear. 

Adapting to Change: 

“Regularly reviewing and adjusting your plan ensures resilience against evolving personal goals and unforeseen events.”

Bestselling author Morgan Housel encapsulates the transformative nature of time with his statement, “World War II began on horseback in 1939 and ended with nuclear fission in 1945.” In the realm of retirement, where uncertainties abound, one undeniable certainty is change. Your retirement structure should be dynamic, embodying a key principle of financial planning—adaptability. Regularly reviewing and adjusting your plan ensures resilience against evolving personal goals and unforeseen events. 

Adaptability Strategies: 

  • Regular Reviews: Schedule periodic reviews to assess the effectiveness of your income plan and make adjustments as needed. 
  • Flexibility: Build flexibility into your plan to accommodate changes in lifestyle, healthcare needs, or financial goals. 

The Completed Project: 

“Be sure to carefully reflect on the structure you have built, ensuring proper alignment and cohesion with your aspirations and financial goals.”

As you conclude the process of crafting your foundation for lasting income in retirement, be sure to carefully reflect on the structure you have built, ensuring proper alignment and cohesion with your aspirations and financial goals. In this endeavor, you’re not only securing your own financial future but also building a legacy to endure for future generations. 

Just as a completed architectural project stands as a testament to the vision and skill of its creators, your retirement income structure becomes a tangible representation of your financial success. It’s a timeless blueprint, offering enduring stability to enrich your retirement journey and providing a solid foundation for the chapters that follow. As you navigate the complexities of retirement income planning, you’re not just securing your own well-being, you’re shaping a legacy that will resonate for years to come, ensuring that your financial story stands strong against the test of time. 

“You’re shaping a legacy that will resonate for years to come, ensuring that your financial story stands strong against the test of time.”

It is strongly advised to seek counsel from a qualified financial adviser, tax professional, or attorney before implementing any strategy or acting upon any recommendation outlined herein. Albion Financial Group disclaims any responsibility for the consequences of individuals’ decisions based on the information presented and encourages thorough consultation with a financial professional to ensure the appropriateness of any financial decisions made in consideration of personal circumstances and financial objectives.