(Complete Show Notes Below)
In the 50th episode of the Financial Procast:
Why is Income in Retirement so Different?
In today's broadcast of the Financial Procast, we head off into some deep water with a lengthy discussion surrounding retirement income. What is it about retirement that makes everyone think their life is going to magically change? There's really nothing that is going to decrease the importance of your income when you retire.
One of the worst “rules of thumb” that's been perpetuated among the retirement planning discussion is that somehow you should only need about 80% of your pre-retirement income during your retirement.
What? Who came up with that idea?
Yeah, there are some circumstances where people make a strategic decision to live on less so that they can leave a job they hate or a career that has come to an end. However, I'm not aware of any case where someone just arbitrarily reaches 65 and says, “Yep…that's it…I'm done and now I'll be happy living on less income now”
Just doesn't happen.
Most of us are accustomed to living on a monthly budget, we're paid every week, every other week or twice a month. So, it stands to reason that having some income producing assets that provide that sort of income would fit nicely into our world…right? It makes your life much easier to budget when you break it down into smaller pieces. We're all billed monthly for our basic services and we have learned to live within our monthly budget. Furthermore, those monthly bills don't stop coming after you retire.
What's Wrong with the Retirement Planning Industry?
For years, the industry as a whole has been focused on helping people to accumulate wealth. There has been very little focus paid to the distribution of those assets. Consequently, not many advisors have the skill or education to effectively assist their clients with planning for retirement income. In fact, we would suggest that generating income is completely contrary to the goal most financial advisors have been trained to pursue.
Another major problem is that assumptions used for planning income have been skewed by a set of faulty data. If we look back at someone who retired in the early 1980's, they would have been able to buy long term bonds that had really high coupons (think above 10%). So, that falsely set the expectations of many people that they would always be able to obtain really high fixed rates on bonds during retirement.
I'll just invest primarily in equities during my working years and then swap my allocation over to more heavily weight bonds that pay a nice juicy coupon. Well, we all know how this is working out now for people retiring today.
Not to mention a serious flaw…bonds are not without risk. There's default risk and interest rate risk, both of which many people have learned about the hard way.
Okay…what's the solution?
Listen and find out. Enjoy!