When you buy clothes, you make sure they fit first. Why not do the same with your financial plan?
As I’ve said many times, in my experience, shifting your investment focus from growth to income in the years just before or during retirement makes sense for most people. But how do you know if an income strategy is really right for you? Here I’ll share some tips to help you make that determination. I’ll cover: the basic objectives of investing for income; how those objectives fit the retirement goals of most Americans; who the exceptions are; and four questions to help decide if investing for income is right for you.
Let’s start with the basics. The income model is designed to achieve two primary objectives that become increasingly important as you near retirement: asset preservation and more dependable income. Why are these objectives so important? Well, according to the Employee Benefit Research Institute, an estimated 40.6 percent of all U.S. households led by someone aged 35 to 64 are projected to run short of money during retirement.
In some cases, people struggle financially in retirement simply because they failed to save enough during their working years. However, in many cases, it’s not that simple. You may have saved plenty but end up struggling for other reasons. Maybe you never really got serious about retirement planning. Or perhaps you didn’t have a plan to help maximize your Social Security or help minimize the impacts of inflation. Maybe you have the same issue with taking your required minimum distributions. Those issues and others can jeopardize your retirement income no matter how much you’ve saved.
Now let’s look at how these core income objectives line up with the retirement goals of most people. A recent survey by the Teachers Insurance and Annuity Association found there are three common themes almost all Americans are looking for in retirement: One, they want freedom from financial worries. Two, they want flexibility, both with their lives and their finances. Lastly, they want to spend time with family, relax, and travel.
Chances are those themes sound familiar because they’re basically what you want from retirement, too. However, to make it happen, you need to go further. You need to identify your specific goals around those themes. Travel where? Relax how? Once you’ve identified your goals, the next step is to ask yourself how you want to pay for them. Would it be by selling stock shares? Probably not. Most likely, yours are the type of goals you’d want to pay for with your regular income stream. Once most people realize this, they quickly see the sense in having a financial plan geared toward generating more reliable income.
When I say the income strategy is right for most people, it must mean there are exceptions. There are basically three: First, if your investment goals are performance-based rather than purpose-based, you might be an exception. Purpose-based goals are those we’ve talked about. You’re investing for a purpose, typically so you can travel, relax, and spend time with family. If your goals are performance-based, it means performance is your only priority. Investing is a competition, and you want maximum return for its own sake or for bragging rights.
Two, if your retirement goals include a major purchase or leaving a large legacy, you might also be an exception. If that’s the case, you might need or want to pursue a level of growth that requires more risk – even if it means sacrificing flexibility and peace of mind. And three, you’re Warren Buffet or some other top institutional investor. If that’s the case, you have two things in your favor the average investor doesn’t have. One is a net worth so high you can afford a major loss, and the second is a controlling interest in the companies you invest in. If you’re an everyday minority shareholder, you have no such control. When you invest for growth, you’re just betting on probability, and there’s another word for that: gambling.
Now, here’s a short, four-question quiz to help you determine, once and for all, if the income model suits you. Question one: Is peace of mind a high priority for your retirement? If you’re like most people, it is. Question two: Is financial flexibility important to you? One thing many people worry about is having an advisor who can’t or won’t help them adapt to changes in their lives or in the financial markets. Question three: Are your goals purpose-based or performance-based? Finally, question four: Have you saved for retirement? Most people have, although many worry that they haven’t saved enough. The good news is that lots of people also put too much emphasis on their lumpsum, and not enough on having the right strategy. Remember, there are many issues that can jeopardize your retirement income no matter how much you’ve saved. At the same time, a strategy that addresses those issues head-on can help you enjoy a more successful retirement even if you think you haven’t saved enough.
Now, let’s check your answers. If you responded ‘yes’ to at least three of the four questions on this quiz, then the answer to the question, Is Investing for Income Right for Me, is probably also a resounding yes.
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. Arbor Financial Services of Florida, Inc. and Sound Income Strategies, LLC are not associated entities. Arbor Financial Services of Florida, Inc. is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities.