Retirement Planning Philosophy

By its very nature, retirement planning should be very simple: find a reasonable average rate of return, determine your expected post-retirement expenses, locate a post-retirement safe-haven return, and make your monthly retirement contribution.  Once those criteria are fulfilled, your accounts open, and investments made, it should only be a matter of time before you reach retirement, right? This type of retirement planning philosophy has remained unchallenged for more than a century.  All that has changed in the last 50 years is who will pay the bills.  Previously, most employees could count on some type of pension, but with businesses struggling to forecast their own benefits, let alone the returns of the debt and equity markets, saving for retirement has been fully placed on the employee.

In many regards, retirement planning performed by employees rather than employers does promote individuality and the ability to personally decide how one should plan for the days without an income.  Also, it has helped spread the retirement planning risk from the business to the individual, as well as diversify retirement plans from those 100% based on the employer to a portfolio inspired by the marketplace.

Unfortunately, the collective conscious of today's individuals isn't always as accurate as the employer's financial models once were.  This type of irregularity promotes a mindset that encourages either over-savings or over-spending.  However, truthfully, the goal of retirement planning should be to balance pre-retirement and post-retirement expenses, and never taking from today to have in the future, nor taking from the future to have today.

Moderation in Standard of Living

While most people generally continue to save too little for retirement, there are still a large number of future retirees who save too much, planning on post-retirement expenses that are either too high or expecting market volatility that is not remotely close to historical performance.

Today, retirement planning focuses on over-saving for post-retirement expenses because of recent volatility and a wild drop in the world economy and financial markets.  It has become a historical trend that following a large drop in equity prices, people plan to save more for the future, spending less in their employed life than they expect to spend on post-retirement expenses.

Unfortunately, over-savings is as much of a problem as over-spending, as people frequently deny themselves too little during their working years, but they consume too much in retirement.  Or, as commonly seen by retirement planners, workers save aggressively in their working years, putting their health in jeopardy to work just one more year.

The problem, however, has more to do with the under-diversification of retirement planning strategy than with over or under-savings. 

The Big Picture of Retirement Planning 

When most people think retirement planning, they picture stocks, bonds, mutual funds, or 401ks and IRAs.  While these are pieces of the puzzle, they are, for the most part, a very small piece of the big picture.  However, with so much emphasis on such a small piece of the big picture, it should be obvious why retirement planning fails so frequently: some pieces are missing. 

Post-retirement expenses practically define the options future retirees have to save and grow their wealth.  First and foremost, savers hope to have enough cash to cover their expenses, including their home, transportation, clothing, and food.  However, then come the secondary wishes, such as a life full of international travel or maybe just a frequent vacation.

Once these living fundamentals and lifestyle desires have been accounted for, future retirees then worry about the unknowns.  Medical care often makes up a large part of a retiree's budget, as do prescriptions, and what about the risk of long term care?  How will a retiree pay for years in a nursing home?  Can they pass wealth onto the next generation? 

Three Insurance Instruments for Smart Retirement Planning 

Rather than compensate for large and unpredictable expenses with insurance, most retirees choose instead to save, save and save even more, plowing cash into investment vehicles they have long since maximized.  In the worst case, many people contribute over and beyond their employer match in otherwise less diversified 401k investments, seeking no other retirement planning alternative.

One of the best parts about retirement planning is how insurance can be used to spread costs over the long term.  One of the biggest post-retirement expenses, one most try to compensate for with excessive saving, is long-term care.  Nursing homes and assisted living are expensive, but relying on children and family can make retirees feel like a burden.

Luckily, long-term care insurance is very inexpensive.  In fact, data from the US government shows that the average 70 year old pays just $3,000 in annual premiums for excellent long-term care insurance.  At 60 years old, those expenses are halved.  Now, isn't it much easier to prepare for fixed post-retirement expenses than unpredictable and irregular, large line items?  Absolutely!

Annuities provide another inexpensive and secure alternative to retirement planning, allowing retirees to purchase what is essentially reverse life-insurance, with a monthly payout coming in the form of a check until death.  

Likewise, whole-life insurance policies allow for regular payment of funeral and burial costs, and thanks to beneficial tax incentives, these policies also allow for retirees to pass on millions of dollars to their children or grandchildren without triggering an estate tax.

Planning and Consistency

With just three products—whole life insurance, an annuity, and long-term care insurance—a stable retirement can be had without excessive reliance on Wall Street earnings or economic conditions.  Plus, unlike other investment vehicles, most annuities are guaranteed by the state, making sure that investors will never be at risk of a change in economic conditions.

Therefore, while it may be advantageous to start the retirement planning process with the worst in mind for your total post-retirement expenses, realize that most irregular, costly and unpredictable burdens can be shifted with very inexpensive and easy to purchase insurance products.  You don't have to give up something today for a stable retirement income tomorrow, nor to pass on a legacy fund for your children.


Tim Ord
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