Your financial needs are NOT unique. Anyone who says otherwise is selling something.
The circumstances may be different, but the goals are always the same. People generally want one or two things out of their investing and financial planning:
1) To create a reliable stream of income - and most people stop here.
2) To gain clarity and purpose for their family wealth.
For most, achieving the first goal is the entire battle and I'll give some perspective on what I see working with many different professions as a financial consultant. We'll save the second one for another time. For the past twenty-five or so years, we've been in love with Wall Street. From the late 80's until about 2001 the stock market could do no wrong. People saw their account values skyrocketing on a very consistent basis with very few hiccups in the overall market. Two very important trends began at this point. First, the American workforce started becoming more independent and more mobile. It was becoming increasingly rare to stay with a single company for 15, 20 or even 30 years. As a result, employers started steadily moving away from pensions. They are costly to provide, and it puts the company on the hook for a very long time to pay promised benefits. Second, with pensions disappearing, there had to be an alternative to allow workers to avoid the vesting headaches associated with long-term pensions.
Enter the 401(k) - The industry's answer for the mobile workforce.
With workers changing jobs more and more, it was a natural step...which changed the retirement landscape forever. The employer was officially off the hook. Now, all they had to do was make their contribution/match to the plan for compliance purposes and that was the end of it. It was now up to the worker to shoulder the investment risk and figure out how to make that money last. This created a PERMANENT sense of security in 401(k)'s that until this point had been more of a supplemental means of retirement savings since being invented in 1978. Pensions started fading away, but now people could take control of their accounts and see their money going in w/ a match each month. Watching that account build felt good, and remember this was the 90's so this was happening with good results. I don't want to give the impression that I'm advocating against 401(k)'s. Far from it. This is often the largest source of retirement contributions and tax deductions available to most of the workforce. The problem we have is people have absolutely ZERO idea how their 401(k) is going to convert into an income later upon retirement.
This is a BIG problem.
Please feel free to look this up - There's a retirement income rule called the "4% Retirement Rule." It states that for however much you have invested in market-based retirement assets, don't take more than 4% per year, adjusted for inflation. If you follow this rule, statistics show you have around an 85% chance of your money lasting through a 30-year retirement and never running out. It is considered the "safe" withdrawal rate and no financial planner in their right mind is going to let you take more than 4% out of investments unless there's an extremely good reason. I have two major problems with this. First, reach the lifestyle you might want, taking a 4% withdrawal...well, you can do the math. To reach a $120,000 starting income, I just told you you'll need $3 million dollars. Problem number two: inflation. It's going to take large amounts of money to make this happen when you account for the value of tomorrow's dollars. The 4% rule is not an acceptable solution to manage risk during retirement, but that's what the industry has come up with. Fortunately, we don't have to settle for this.
Someone who's set up properly can break this rule, but we must begin with the end in mind. There's a right way to go about everything...and you're either INTENTIONALLY planning your retirement income, or you're not. This could be the difference between living with the 4% rule, and taking 7-10% income safely for the rest of your life. I think over the past sixteen years (2001-2017) we have seen the dramatic swings that the market is capable of. Focus on the income stream you're creating and not the account values that you see on paper. There are a lot of smart financial advisors out there who can educate you on how to get out of this 4% pattern, which quite frankly, most Americans are automatically setting themselves up for. My clients tell me that I'm one of the smart ones when I team them about these things, but I'll leave that up to you. Invest with the end in mind. We're not living in the 90's anymore.
Kyle A. Davis is a Chartered Financial Consultant® and president of Integrity American Group, LLC. He is a Florida native and an advocate for financial literacy and practical money education. When not assisting clients in planning for retirement, he creates educational videos on financial wellness and offers free resources on his YouTube Channel!
He can be reached through www.financialservicesamerica.com or directly at 407-271-8029. Investment advisory services offered through Regal Investment Advisors, an SEC Registered Investment Advisor. Integrity Financial Group is independent of Regal Investment Advisors.
