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So… you’re thinking about your retirement. An exciting yet scary proposition. Two crucial questions have promptly crossed your mind… How do we need to save? And where do we need to put it?
To answer these questions, you must remember why you are saving money in the first place. You want to have an income stream in retirement… a paycheck that shows up just like your current paycheck but in retirement you don’t want spend time working for that paycheck… you want your money you have saved to work for you.
Think of it like climbing a mountain… what’s the objective of climbing a mountain? To get to the top? Well not exactly. The ultimate objective is to get to the top of the mountain first, then make it back down safely.
In the context of your financial life, your working years, getting up the mountain is your pre-retirement accumulation phase. Making it back down is your retirement distribution phase. This is one continuous journey. You can’t necessarily call in a rescue helicopter if you don’t have enough supplies to get back down the mountain.
To figure out where to put your savings in your pre-retirement years, you first need to understand how the retirement distribution phase works… how retirement income streams work defines how to pack your bags in pre-retirement.
Many people haven’t had the opportunity to look at retirement from this perspective, which can be very costly.
Back when pension plans were the norm, retirement planning for individuals used to be more automatic. Pension plans put the responsibility of your retirement income in the hands of your employer. Typically your pension amount was comparable to a good percentage of your salary. Pensions plans automatically took into account of both the accumulation of money and the distribution of it for retirement income.
Around the 1980’s things started to changed significantly. As retirement plans like 401k’s were introduced. They started to become the norm. These types of plans meant that employees become more responsible for providing retirement income for themselves. 401k type plans focus mainly on accumulation of money and not on distribution. When used alone they can very inefficient for creating retirement income streams later.
For example, to avoid potentially running out of money in retirement, financial research recommends only withdrawing 3% to 4% from these types of investment assets every year to live on.
These relatively low distribution rates can be problematic… Think about it. You would need $1,000,000 at retirement time to create just $30,000 to $40,000 a year of retirement income.
What about adding inflation to your current income? $100,000 of income today needs to be $180,000 in 20 years at 3% inflation just to maintain spending power.
This would require the accumulation of approximately $5,000,000 by retirement time. How feasible does this sound running your own numbers?
Is this the path you would want to stay on if you had a choice?
The problem in many cases isn’t the accumulation of money in retirement plans like 401k and IRAs, but rather the low distribution rate we could be on track for if that’s all we do.
What if today you could put yourself on a path that provides higher distribution rates from the retirement assets you are accumulating?
Then $1,000,000 could potential create $70,000 to $130,000 a year of retirement income.
By understanding and knowing how retirement income streams work so you can take action now in pre-retirement to position your savings accordingly.
Get off the default path of low distribution rates with our expertise.