2836: Why You Need Multiple Sources of Retirement Income by Darrow Kirkpatrick of Can I Retire Yet

[00:00:30] [SPEAKER_00]: Sources of Retirement Income by Darrow Kirkpatrick of Can I Retire Yet,com?

[00:00:36] [SPEAKER_00]: And on your host and personal finance enthusiasts, Dianomarium, I'm going to jump right into our

[00:00:41] [SPEAKER_00]: next article as we optimize your life.

[00:00:48] [SPEAKER_00]: Why You Need Multiple Sources of Retirement Income by Darrow Kirkpatrick of Can I Retire Yet,com?

[00:00:56] [SPEAKER_00]: The weather

[00:00:56] [SPEAKER_00]: is unpredictable in the high mountains.

[00:00:59] [SPEAKER_00]: We carry special clothing for sun, bugs, wind, rain and cold.

[00:01:06] [SPEAKER_00]: There's no single garment that works for all conditions.

[00:01:10] [SPEAKER_00]: In generating retirement income, you need to diversify too.

[00:01:14] [SPEAKER_00]: There's no single income source ideal for all conditions.

[00:01:19] [SPEAKER_00]: Sometimes a retirement income are good for a lifetime, but lock you into a set cash flow.

[00:01:25] [SPEAKER_00]: Some protect against the menace of inflation, but costs more upfront.

[00:01:31] [SPEAKER_00]: Some maintain flexibility, but expose you to market fluctuations.

[00:01:36] [SPEAKER_00]: The only way to obtain true security in a modern retirement is to generate income from multiple

[00:01:42] [SPEAKER_00]: sources, which take into account, protect you from the range of financial risks.

[00:01:48] [SPEAKER_00]: My framework for thinking about retirement income comes from Steve Vernon's excellent

[00:01:53] [SPEAKER_00]: money for life. In his book, Vernon spells out four goals for retirement income.

[00:02:00] [SPEAKER_00]: Long-gevity protection, inflation protection, flexibility for emergencies or inheritance,

[00:02:07] [SPEAKER_00]: and minimizing exposure to market risk. To this essential list, I'll add two goals of my own,

[00:02:15] [SPEAKER_00]: solvency and simplicity. Let's explore each of these goals and the retirement income sources

[00:02:21] [SPEAKER_00]: that can achieve them. Survey show running out of money is one of retirees' greatest concerns.

[00:02:29] [SPEAKER_00]: You need some level of retirement income to last your full lifetime, and yet you don't know

[00:02:34] [SPEAKER_00]: how long that will be. Dying early is good news financially, but most of us would prefer the

[00:02:42] [SPEAKER_00]: bad news of living longer. You can look at your personal and family health history and make

[00:02:48] [SPEAKER_00]: some rough guesses about your likely life expectancy, but you can't be certain. This is the essential

[00:02:55] [SPEAKER_00]: conundrum of retirement planning. How do you generate income for life? Fortunately, there are

[00:03:02] [SPEAKER_00]: some answers. The retirement income sources that provide longevity protection by design

[00:03:07] [SPEAKER_00]: are annuities, pensions and social security. Over the decades of retirement, inflation is a

[00:03:15] [SPEAKER_00]: serious threat. You have more control over your personal rate of inflation than most pundits allow,

[00:03:21] [SPEAKER_00]: but you can't ignore its potential effects on a long retirement. At the historical inflation rate

[00:03:27] [SPEAKER_00]: of about 3%, the value of your dollars will be cut in half in about 23 years. That's a time

[00:03:34] [SPEAKER_00]: span that many of us or our spouses will live to experience. There are two ways to secure

[00:03:41] [SPEAKER_00]: inflation protection in your retirement income. One is through contractual or legal guarantees,

[00:03:48] [SPEAKER_00]: like an inflation rider, or an annuity policy, or social securities annual cost of living increase.

[00:03:55] [SPEAKER_00]: The other way to obtain inflation protection is by owning the underlying assets that are

[00:04:00] [SPEAKER_00]: inflating and value. Businesses, or stocks, real estate, commodities, rather than keeping much of your

[00:04:08] [SPEAKER_00]: cash. The most important lesson of my early retirement so far has been this, stay flexible.

[00:04:17] [SPEAKER_00]: Despite careful planning, our financial life has been less than predictable. Our tax returns

[00:04:23] [SPEAKER_00]: have been dramatically different each year. Some of the news has been good and inheritance,

[00:04:29] [SPEAKER_00]: a modest income from this blog. Some of the news has been bad, medical bills, car repairs,

[00:04:36] [SPEAKER_00]: travel expenses. Even though we're currently in our ideal retirement location,

[00:04:42] [SPEAKER_00]: our feelings or needs could change and we could move on. That would be an expense.

[00:04:48] [SPEAKER_00]: Like many, we want to pass on assets to worthy causes and the next generation when we die.

[00:04:54] [SPEAKER_00]: That requires not locking all of our wealth up in annuity contracts. How do you retain

[00:05:06] [SPEAKER_00]: liquid portfolio of stocks, bonds and cash? Unfortunately, stocks entail market risk.

[00:05:13] [SPEAKER_00]: Stock prices fluctuate based on supply and demand and the economic cycle.

[00:05:18] [SPEAKER_00]: For experienced long-term severs, this isn't a problem. It comes with the territory of investing.

[00:05:25] [SPEAKER_00]: But in retirement, when you must draw on your assets for income, when you must factor in an

[00:05:31] [SPEAKER_00]: certain lifespan, when you may be battling physical or mental decline, volatile assets are a

[00:05:38] [SPEAKER_00]: serious issue. You can't necessarily wait out a market downturn in your 80s or 90s.

[00:05:45] [SPEAKER_00]: The traditional income sources that insulate you from exposure to market volatility are fixed

[00:05:51] [SPEAKER_00]: income, bonds, CDs, bank savings. People often think of these kinds of assets as safe,

[00:05:59] [SPEAKER_00]: yet they're not safe from longevity risk or inflation.

[00:06:04] [SPEAKER_00]: Annuities and social security are safer still. They potentially protect against three risks,

[00:06:10] [SPEAKER_00]: longevity, inflation and market exposure. But with them, you lose flexibility. There's no access

[00:06:18] [SPEAKER_00]: to your principle. And with annuities in the worst case, there is solvency risk.

[00:06:24] [SPEAKER_00]: Annuities are sold as a sure thing, an asset no different from owning a business or real estate.

[00:06:31] [SPEAKER_00]: But in fact, an annuity is a contract with an insurance company. You are betting that company

[00:06:36] [SPEAKER_00]: will stay in business to make regular income payments for decades. Under normal conditions,

[00:06:43] [SPEAKER_00]: that shouldn't be a problem. Insurers are heavily regulated and insured, and most are highly

[00:06:49] [SPEAKER_00]: profitable. But we aren't just concerned with normal conditions here. Under normal conditions,

[00:06:55] [SPEAKER_00]: you can also put all of your money in a broad-based index fund and come out way ahead of most

[00:07:01] [SPEAKER_00]: other potential retirement income sources. It's when economic conditions are abnormally bad

[00:07:07] [SPEAKER_00]: that we need to be especially concerned about solvency. And I'm not convinced that insurance

[00:07:13] [SPEAKER_00]: companies would be any better off than the rest of us. If the economy is so weak,

[00:07:18] [SPEAKER_00]: that a diversified investment portfolio is permanently damaged, can we be certain that insurance

[00:07:24] [SPEAKER_00]: company payments wouldn't be affected? The federal government may be marginally better off than

[00:07:30] [SPEAKER_00]: insurance companies in a prolonged downturn. It can create money after all at the price of inflation.

[00:07:38] [SPEAKER_00]: But without changes, social security will be insolven in less than two decades.

[00:07:44] [SPEAKER_00]: According to the annual report of the Board of Trustees, social security will only be able to pay

[00:07:50] [SPEAKER_00]: about 75% of scheduled benefits starting in 2033. Bottom line, the portions of your retirement

[00:07:59] [SPEAKER_00]: income that depend on private or public pensions are only as good as the institutions standing

[00:08:05] [SPEAKER_00]: behind them. At some level, almost no retirement income source is free from solvency risk.

[00:08:12] [SPEAKER_00]: But your risk is lower anywhere there is less bureaucracy. The more directly you own your assets,

[00:08:20] [SPEAKER_00]: living on your own fully paid up farmland would be the ideal. The less chance you'll be affected

[00:08:25] [SPEAKER_00]: by somebody else's bankruptcy. My final goal for retirement income is simplicity. Many seem to

[00:08:33] [SPEAKER_00]: think that financial success is about technical sophistication or gaming the system. But my experience

[00:08:40] [SPEAKER_00]: says the opposite, wealth-building is about transparency and simplicity. Spend less than you make,

[00:08:47] [SPEAKER_00]: grow the savings and don't lose it. It's much easier to accomplish this if you minimize the

[00:08:53] [SPEAKER_00]: moving parts. The often unseen risk of complexity is that you may not be getting what you think you are,

[00:09:01] [SPEAKER_00]: and that's true or that ever in retirement when you're less and less able or inclined to manage

[00:09:08] [SPEAKER_00]: exotic financial assets. What's the simplest way to maintain simplicity? Reduce the number of

[00:09:15] [SPEAKER_00]: your financial holdings and reduce their cost. Expenses have proven a high reliable negative

[00:09:22] [SPEAKER_00]: indicator. High costs typically mean high complexity, low returns, and bad news. Ultimately,

[00:09:30] [SPEAKER_00]: most retirees will need multiple sources of income just to make ends meet. But there's an equally

[00:09:36] [SPEAKER_00]: important reason to seek multiple streams of income in retirement. Financial security in your

[00:09:42] [SPEAKER_00]: later years requires meeting the competing goals of longevity protection, inflation protection,

[00:09:49] [SPEAKER_00]: flexibility, reduced volatility, solvency and simplicity. Given that no single retirement

[00:09:57] [SPEAKER_00]: income source achieves all of those goals on its own, you will need more than one source of

[00:10:03] [SPEAKER_00]: income in retirement. For maximum security, most retirees will want one income stream that is

[00:10:09] [SPEAKER_00]: market-based like stocks, one that's insurance-based like an annuity, and one that is socially

[00:10:16] [SPEAKER_00]: based like a pension or social security. With those three types of income in place, you'll be

[00:10:22] [SPEAKER_00]: prepared for any kind of retirement weather. You just listen to the post titled, Why You Need

[00:10:32] [SPEAKER_00]: Multiple Sources of Retirement Income. By Derro Karpatric, of can I retire yet.com? And I'll be right

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[00:11:43] [SPEAKER_00]: When talking to my friends who are actively drawing down from their portfolios, the theme

[00:11:48] [SPEAKER_00]: I keep hearing over and over again is the need to be flexible. It's nearly impossible

[00:11:54] [SPEAKER_00]: to come up with a drawdown strategy for the rest of your life because you'll never be able

[00:12:00] [SPEAKER_00]: to accurately predict right now what your expenses are going to be or what the market will

[00:12:05] [SPEAKER_00]: be doing 30 years from now. Financial modeling and planning is based on a ton of assumptions.

[00:12:11] [SPEAKER_00]: And there is inherent uncertainty baked into the process. That reality makes people very uncomfortable,

[00:12:19] [SPEAKER_00]: so opting for something like an annuity could feel safer but I think deraud did a great job

[00:12:24] [SPEAKER_00]: of explaining why that isn't necessarily true. And if I've learned anything from my retired

[00:12:29] [SPEAKER_00]: friends, it's that it's possible to become comfortable with uncertainty while also diligently

[00:12:35] [SPEAKER_00]: planning for the future. It boils down to flexibility, especially if you retire young. You must be

[00:12:42] [SPEAKER_00]: open to the potential that you'll need to earn money in some way in the future, but you'll likely

[00:12:48] [SPEAKER_00]: be in the financial position to be super picky about how you are in that money. You must be open

[00:12:54] [SPEAKER_00]: to reducing your expenses or making adjustments or going back to the drawing board and reassessing

[00:13:00] [SPEAKER_00]: your plan B, C, and D. Your financial security is not only found in your investment portfolio.

[00:13:08] [SPEAKER_00]: It's also in your intelligence, your curiosity, and access to different tools and solutions.

[00:13:14] [SPEAKER_00]: In the face of an uncertain future, it is possible to set yourself up to pull different

[00:13:20] [SPEAKER_00]: levers at different times depending on what the situation calls for. And that should do it for

[00:13:25] [SPEAKER_00]: today. Have a happy rest of your day, and I'll see you for the Tuesday show tomorrow,

[00:13:30] [SPEAKER_00]: where your optimal life awaits.