Trade-offs and Your Retirement IncomeSubmitted by Fountain Financial Associates | Financial Advisors on June 5th, 2019
Posted by Brice Gibson in the FFA Summer 2019 Newsletter
Life is full of trade-offs. Financial planning and retirement income planning have many trade-offs depending on your goals. When we talk about trade-offs in retirement income planning there are differences. Prior to retiring, we make many trade-off decisions that affect our retirement. Virtually every decision to spend money prior to retirement could be viewed as a trade-off decision to retire later or retire with less income in order to pay for something now. The big decisions and expenses, such as helping pay for a child’s college education or choosing to drive a nice car, can certainly delay retirement or reduce your retirement income. But the little decisions can add up as well. I use this example with younger clients that are starting to save for retirement:
I like Starbucks. In fact, I love that they can make me a coffee exactly the way I want it. However, imagine if there is a Starbucks conveniently located on your way to work and you get a great coffee every day when you go to work. In turn you pay $4 for a cup of coffee every morning for 5 days a week, 50 weeks a year, for 40 years. That’s $1,000 per year for 40 years or $40,000. But wait, what if instead you invested that money and made 6% per year? Then that would be $154,761.97 at age 62… WOW, you must really love that latte!
I’m sure you get the idea. Big expenditures matter, but so do lifestyle choices. These pre-retirement choices are important trade-offs that affect retirement. I think there are two very important trade-offs to consider during retirement that will affect your retirement income:
- Would you rather have higher income or more stable income over time?
- Would you rather have higher income or more left to your heirs?
These are not simply either/or questions. Many retirees end up somewhere in the middle between the two extremes. You may be partial to the idea of stable income, but not like the fact that a 100% stable income stream might be less than 3% of your assets. Your concerns may not be wrapped-up in leaving an inheritance to your heirs, but you may dislike the idea of leaving nothing behind.
In the past we have written about the power of having flexibility in your retirement spending. Being willing to cut your spending or “tighten your belt” in a bad market can drastically increase the effective withdrawal rate. If you are willing to leave little or nothing to your heirs, this may require entirely different planning tools and investment products that may not be suitable otherwise. The less you are concerned with your estate, the greater the benefits of pensions and income generating investments. This is particularly true as you age. The answer to the second question may not matter for young retirees. However, your desire to leave something behind really comes into focus as you age and your life expectancy shortens. It needs to be discussed not only in regard to your estate plan, but also with your investments. Many of the rules you hear about getting more conservative as you get older assume that you do not care what is left behind.
Remember, trade-offs are a cornerstone of financial planning and financial decisions. Keep these two in mind when planning for or living in retirement. Having a strategic plan in place that you are confident in to meet your goals is crucial to living a comfortable retirement. We are here to support your success!