How to maximize retirement ‘paychecks’

The last 30-40 years of our clients’ working lives have been spent managing family finances, typically with two paychecks a month. Upon retirement, they’ll speak to the HR department at their office and fill out distribution papers for their 401(k) or profit sharing plan. These funds, along with Social Security, will replace their customary paychecks to cover their living expenses for the rest of their life.

As financial services professionals, we have to do our due diligence to help our clients optimize their portfolio in their golden years and safeguard them from financial mistakes. Most can’t afford any lapse in retirement because they are no longer working or making contributions to their retirement plan.

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Whenever I begin a conversation with clients about retirement income planning, I always refer to “paychecks” — a concept I learned from Tom Hegna’s book, Paychecks and Playchecks.

It’s important to help your clients determine the best way to turn their amorphous lump of investments into “paychecks” every month. This money has to put food on the table, pay real estate taxes, cover medical emergencies, keep the gas and phone on, etc. People get use to paying bills, but need to be careful withdrawing in a declining market — especially in the early years of retirement. This can be damaging to the point where it is difficult to recover because they aren’t accumulating money to refill their income bucket.

Diminished assets

Throughout our professional years we act as accumulators to build a portfolio of desired value. During this phase of life, we don’t have to touch the money in our retirement plan because we are constantly adding to it. However, once we hit retirement, our assets diminish because we aren’t replacing them. This can cause a real problem for someone who has to budget their funds similar to their bi-weekly paychecks.

Unplanned scenarios do occur and history has proved that since the Great Depression every six to eight years the stock market has experienced a correction of 20% or more. That means on average, one could experience a significant decline in their retirement portfolio value five to six times over a 25-30 year retirement life expectancy. How does one protect against this financial reality?

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Retirement scholars seem to agree that the best mix of investments would include fixed income annuities, variable annuities with income guarantees and mutual funds, or stock brokerage accounts. Not one of these three allocations should, generally, ever get 100% of a person’s retirement funds. After careful planning, fixed and variable annuities can provide income for life and protect one’s “downside.” They can even facilitate a more aggressive mutual fund and brokerage account investments because of their income protection qualities.

If you ask people how they would make decisions today while working, most would tell you they can only make an educated guess or seek advice from financial professionals. Imagine how disconcerting this is when they no longer work and earn paychecks. Talk with your clients about their retirement “paychecks” to help them feel more confident about their golden years.

Ashe, CLU, has been in the insurance and investment business since 1969, assisting clients with life, health, disability, annuity and equity products. His work is concentrated in estate conservation, retirement planning, employee benefits and business insurance strategies. He is a 44-year member of the Million Dollar Round Table.