It’s likely that if you’re a Federal employee, age 50 or older, the day you put in your papers for retirement is never far off in your mind. Most of us look forward to the day when someone else has taken over our professional obligations. So it’s natural to wonder if in fact you can actually retire.
During my thirty plus years of working with pre-retirees and retirees alike, I have always believed in the hub and spoke theory—think of a bicycle tire. You’re in the center, the hub, and multiple sources of retirement income are the spokes. Simply put, more spokes are better. It means you are not overly dependent upon any single source (spoke) of retirement revenue, which, for obvious reasons, helps insulate you from the economic vagaries of a life in retirement. It’s logical to assume that to achieve a secure retirement, we need financial stability and structure with a good dose of discipline to ensure we’re prudent with our spending.
However, multiple spokes of income is actually part 2 of the planning process. It’s important that whatever the sources of income, they must meet our stringent criteria. Running short of money probably ranks as one of the two biggest concerns, with health care being the other. We need enough to live on for the duration of our life, but exactly how long is that? (Please don’t answer this) We need more than enough to live on, not less than we need. We also need to plan for expenses that are unplanned, unexpected, and by extension, unwelcome. Making our dollars count as prices move higher is also an important consideration. To do this, we need to grow our liquid assets to counter potential inflation. We really want something that is easily understood.
In my opinion, before you prescribe a financial solution, it’s critical to first diagnose the issues. In our office, we have some funny acronyms, but they’re memorable and work to explain broad based concepts. Specifically, we will review two: FILMS and SWAN. Don’t laugh.
There are 5 simple concepts to grasp prior to any retirement financial investing. These 5 concepts are wrapped up in what I call FILMS: Taking care of FILMS will naturally lead to your SWAN!
Flexibility for emergencies
Minimize market exposure risk
Taken together, they can form the core of a solid and secure retirement plan, since they help ensure that your sources of income meet these requirements.
Flexibility for emergencies—Very straightforward. It might be a large and unexpected home or car repair, helping a child or parent in need, or a personal medical issue. If you haven’t done so already, begin to set aside money for these eventualities.
Longevity protection—No one single person knows when their last day is. We need to have more retirement income than we need, versus less. If we’re planning a three hour car ride, we fill the tank with more gas, even if we expect to pass a service station, versus filling with less gas hoping to find a gas station.
What do we do to help ensure longevity protection? We need streams of income that we cannot outlive. This includes income from a work pension, income from an insured annuity and income from Social Security.
Inflation protection—If you’ve been to the supermarket recently, you know what inflation is. It’s the “new” price of something that is always higher than the “old” price. It’s often overlooked since the price increase is usually minimal. An item that used to be $ 1.89 is now priced at $ 2.09. Twenty cents you say? Well that equates to a price increase of more than 10%. Did your paycheck increase by 10% last month? In fact, the Federal Government’s cost of living adjustment, called the COLA, has recently ranged from 0% to about 2%. I call that a diet-COLA.
If your retirement income plan does not factor inflation into the structure, your advisor or you are doing a huge disservice. Historically, inflation has run around 3%. At this rate, your retirement income will effectively be cut in half in roughly 24 years. Too far in the future to think about? See Longevity protection above. Almost every working Federal employee today will encounter this. It’s a big issue—don’t ignore it.
Minimize market risk— Retirement assets need to grow, which in turns, helps increase retirement income to combat looming inflation. We have lived through unsettling stock market drops along with a host of other economic and global issues. Still, long term growth investing has paid off handsomely.
So how do we allocate money towards growth before and during retirement, if we seek both decreased volatility and reduced market exposure? We need to apportion some retirement money where it can potentially grow, but also protect us from downside risk. Traditional investing in mutual funds and individual stocks, may offer greater upside, but can come at the expense of losing money, and therefore, do not accomplish our need for protection. Fixed income or bond investing comes with interest rate risk, but also relatively low interest paid.
One way to manage this is to designate a portion of your retirement account to a fixed index annuity. It’s offered by large financial institutions and allows us the opportunity to continue to grow our principal, and retain all gains, regardless of any future market decline.
Note this is not to be confused with a variable annuity. A variable annuity, by definition, varies, and your hard earned retirement dollars can go up, but can also go down, and is usually laden with fees and charges. If you own a variable annuity, contact me for a free in-depth analysis report. You should know what you really own. If someone is proposing a variable annuity to you, run. An annuity that is indexed is completely different and offers principal protection.
Simplicity—Retirement plans, however structured, should be simple and easy to understand. You need to know how your monthly income is generated, how your assets are protected, and how to combat the various forces that work against you. If you or your advisor cannot articulate the strategic retirement plan, then it’s time find a new advisor. Fast.
Having multiple sources of retirement income and retirement security is necessary to meeting future, and unexpected expenses. Federal employee pensions and Social Security (FERS employees) make up two of the three legs of the retirement income stool. The income from your TSP rollover is another. While it’s best to have other ‘legs’ of retirement income, it’s also necessary to pay heed to the concepts set forth in FILMS. Social security and your pension are cash-flow assets—they are not portable and provide lifetime income with only modest inflation protection. Growing some of your retirement assets through an index annuity, can offer increased retirement assets that are in fact portable. Not only can it provide income for life, but it’s yours, not the Federal Government’s. These concepts will lead to your
SWAN—Sleeping Well All Night. Don’t laugh.Having enough retirement income is critical as we know. Having it properly structured to provide you with your SWAN, is how it begins. Ask yourself, in retirement, do you want to be the tourist, or working as the tour guide.