The Do-it-yourself Pension (the 401k) Is Failing Retirees

(checkout the video of this blog too)

401k’s became a widespread phenomenon in the early 80’s.

Prior to these tax-advantaged retirement vehicles people were primarily relying on company pensions for their retirement (which were great).

However, 401k plans became much more popular with employers because they were cheaper and much more predictable to manage than pensions.

But pensions offer one thing that 401k’s do not….

…. and it’s one of the most sought-after benefits in retirement….

It’s a guaranteed, lifetime income source that you can never outlive. 😏

With 401k’s dominating the marketplace now, retirees are now responsible for determining how long their money will need to last in retirement (but it’s a complicated math equation that can’t fully be solved because nobody knows how long they’re going to live).

Retirees no longer have the comfort of a guaranteed income source (outside of social security) that they know will last forever like they did back in the days of the company pension.

Retirees now must create their own retirement income or live in fear that someday they may simply run out of money in retirement. 😟

As a financial planner, I think that’s an unacceptable risk to be taking in retirement.

But what other choice do retirees have right now?

401k’s shifted the responsibility of managing income in retirement solely onto the shoulders of retirees…

It’s put a lot of people in a very precarious situation in retirement…

Many people aren’t sure if they have enough money to last in retirement.

And how do you know if you have enough money to last the entirety of your retirement (one study showed that unless you had almost $15M saved for retirement, you were still unsure)?

Does it really take $15 million to retire comfortably?!

The answer is no.

But, to retire comfortably you must make sure you mitigate a couple of risks in retirement:

1) You Must Eliminate the Risk of Volatile Markets Destroying Your Retirement Income.

To retire comfortably you need to ensure that your entire portfolio has some type of stop-loss, or guarantee that your money cannot go backwards (or what I call “safe money”).

This can help prevent your portfolio from going into a downward, death-spiral that can cause you to deplete your assets very quickly if the market drops in the early years of your retirement (plus can allow you to take double the income from your investment portfolio).

2) Create a Proper Income Plan in Retirement to Address the Longevity Risk (the risk of outliving your retirement assets).

This means creating an income floor, or income sources that are guaranteed to last as long as you do.

This will likely include your social security, required minimum distributions you have to take out of your retirement income sources, and likely a guaranteed income vehicle through a private insurance company (which can allow you to transfer the risk of outliving your money to a big company built solely for that purpose).

3) Mitigate Taxes In Retirement to Maximize Your Income.

This can mean repositioning assets into tax-free buckets, setting up wealth-transfer vehicles to pass money to your beneficiaries without taxes, earmarking assets for possible long-term care situations, and keeping your “provisional income” low enough to prevent your social security from being taxed (which alone can extend your retirement income by up to 7 years!).

All of these items factor into a proper income plan in retirement.

401k’s are great vehicles for reducing your taxable income in your peak-earning years, and for accumulating a large nest egg for retirement, but as you approach retirement you have to start thinking in terms of income, and how best to maximize it in retirement.

It also makes sense to position your retirement assets in a way that guarantees you can NEVER outlive your money in retirement (if that’s consistently the number 1 concern for retirees, then it should be the number 1 thing that is addressed in a retirement plan).

If you want to chat more about that, just reach out.

That’s what I do. 😎