Understanding Your Retirement Income, “With Certainty Comes the Freedom of Spontaneity”

By Danny Howes, EA, RFC

Those words have stuck with me for years, ever since a very successful and wealthy mentor of mine uttered it to me.  When pondered, it has many applications. As a financial confidant, I use this concept to illustrate the importance of stability of income and understanding your retirement income.  With certainty of income, whether as an individual or a business, you can have a tremendous amount of spontaneity.  There are few things in life we can label as “certain,” so I use that word with caution.

Understanding Your Retirement Income: The Three-Legged Stool of Retirement

With regards to understanding your retirement income, it really isn’t that complicated. Retirement income in America has been built on a three-legged stool that people have relied upon for nearly a century: Social Security, Pension, and Investment Income.  Since the turn of the new century, a massive transformation has taken place regarding this concept.  Pensions have all but gone the way of the dinosaur; very few companies offer them.

With the invention of the 401k, the responsibility of a dignified retirement has been transferred to the worker.  This has turned a three-legged stool into a two-legged stool for many folks.  To add more fuel to the fire, the government has imposed what I call a “hidden tax” on baby boomers and retirees in the form of artificially low interest rates.  For the 10,000+ people a day retiring, this can be a devastating reality.  The old adage of investing money in safe investments, living off the interest and conserving the principal has become more difficult than ever.

This triggers many people to make very challenging decisions.  They may decide to take more risk or look to exotic alternatives to get that income they need.  They may decide to reduce their lifestyle and expenses to conserve their wealth.  Or, they may give up on leaving the legacy they originally planned for children or charity, because they feel they are forced to spend down their estate to live the lifestyle they desire.

Asking Questions Helps Safeguard Your Retirement Income

The truth is, there are still very sound, time-tested, and fundamentally-common techniques to reach the income goals you desire.  It all starts with a modern-day proverb by Steven Covey: “Begin with the end in mind.”  Reverse engineering where you want to go and defining the desired outcome is the most powerful tool in designing a financial plan.  The saying goes, “Failing to plan is a plan to fail.”  Just merely saying “I need or want to make more interest” is equivalent to saying “I just need to eat something.”  In a quick pinch, just eating anything might be sufficient.  But if we just eat anything all the time, the result is well known to all of us…usually not a good or pretty one.

Three questions you should ask yourself before making financial choices are crucial but not limited to the following: What’s my long-term goal?  Does this fit into my lifelong plan and desired end result?  Can I live with the worst-case scenario outcome?