Retirement Income
Investment Planning - Step One
Your retirement income investment plan starts now, right now, no
matter how old or well heeled you happen to be.
Step One is to understand what a retirement plan is, and to
identify the three large numbers you need to keep track of while you are
developing your stash. With these three totals on your spreadsheet, it's much
easier to develop long-range retirement income goals that make personal sense.
A retirement plan is an income production plan. Guaranteed retirement income -
projected expenses = the gap. No gap, add parents and children to the expense
number. There's always a gap.
Employer provided pension plans, Social Security, and (always much
too expensive) fixed annuity contracts, are retirement income providers. They
are monthly income machines that you have paid dearly for but which may not be
adequate to cover your retirement expenses--- most of us will need more income
than our guaranteed benefits will provide.
And we need to develop these additional income sources while we
are still earning some kind of income. The retirement plan is the investment
process you employ to eliminate the gap between your projected guaranteed
income and a conservative estimate of your retirement expenses. The sooner and
smarter you invest before retirement, the easier the transition from full
employment to full vacation will be. Smart investing involves separating your
security selections by purpose, and monitoring their performance in the same
way. You're never to young to start developing the income side of the
portfolio.
Once you start to draw income at retirement, it is much more
difficult to invest effectively and unemotionally. Since your income will need
to remain secure and constant through several economic, market, and IRE
(interest rate expectation) cycles, you really need to develop appropriate
portfolio market value expectations if your program is to survive. You cannot
afford to take your eye off the income ball, because income is the only thing
you can spend without depleting the productive value of the assets in your
investment portfolio.
Obvious? Yes, but only until the market value of your portfolio
begins to shrink as a result of economic, market, and IRE cycles. If you invest
properly, it (the income) should continue to grow in spite of changing market
conditions and fluctuating market value numbers. You must learn to expect
market value fluctuations and take advantage of them--- assuming, of course,
that you are following appropriate quality, diversification and income
generation standards.
Retirement income planning became more difficult for most of us
around the time corporate America realized that defined benefit pension plans
were far too expensive to manage and maintain. At around the same time, the
Social Security trust fund somehow disappeared (Did it ever exist at all?), and
more and more of our hard earned was needed to support our aging friends and
relatives. Why haven't the myriad of defined contribution programs been able to
fill the retirement income gap?
Because millions of totally investment-inexperienced people were
given discretion over billions of investment dollars that could be tax detoured
out of their paychecks and into IRAs, 401ks, 403bs, Thrift, Savings, Thrift/Savings
Plans, etc. Self directed investment programs generated a need for an
investment media; the investment media fueled the speculative juices of an
emotional and naïve mass of newbie investor/speculators; Wall Street created
tens of thousands of new products and compound income schemes to sponge up the
wayward dollars.
The Masters of the Universe were ROTFLOL while the Investment gods
gaped in disbelief.
Defined Contribution plans are just not retirement plans--- even
if your employee benefits department, the media, Wall Street, and Uncle assure
you that they are. Most plans are difficult to self-manage with a retirement
income objective. Still, these benefit plans are necessary and quite capable of
taking you close to where you want to be. Their only drawback is the false
sense of wealth and retirement security that they promote. Either the money has
to be converted into an income portfolio--- a costly and time-consuming
process--- or far too many mutual fund shares have to be sold to produce the
spending money
Most people think of savings and investment programs as retirement
plans, and rationalize away the need for additional, outside development of an
income investment portfolio. This is because all of the information they
receive speaks to market value growth instead of to income. It's very likely
that less than half the money will ever be yours to spend! What, you say---
why? Here's an example. A NYC resident
with a $3 million IRA retires with the expectation of maintaining her life
style. Even invested for income alone, $15,000 per month is easy to generate.
But how much more has to be disbursed to satisfy three levels of tax
collection?
Next example. The same portfolio in equity mutual funds during a
correction--- now you're dipping into principal!
Even though defined-contribution plans are excellent mechanisms
for growing an investment portfolio with your hard earned, pre-tax, dollars,
most plans and most plan participants worship the market value god to the
exclusion of all others. Most people are too greedy and/or tax-averse to
convert them into income producers during rallies--- when they can lock in a
meaningful cash flow. Additionally, the counter productive IRC encourages our
use of owned assets first--- a universally ignored phenomenon.
The "buy and hold" mutual fund mentality doesn't
transition well from growth to income--- regardless of the fund category or
description; the idea of helping people into a comfortable retirement hasn't
stopped the tax collectors; the market cycle is just as likely to be down as up
when your gold watch is presented. You have to do more, and less, to secure
that comfortable retirement.
Step One of the retirement plan is developing a focus on income,
and understanding that spending money and market value are not blood relatives.
Step Two is developing the right combination of tax deferred and tax-exempt
income--- among other things.
Steve Selengut
http://www.kiawahgolfinvestmentseminars.com
http://www.valuestockindex.com/
Author of: "The Brainwashing of the American Investor: The
Book that Wall Street Does Not Want YOU to Read", and "A
Millionaire's Secret Investment Strategy"
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Retirement Income
Investment Planning - Step One
Employer provided pension plans, Social Security, and (always much
too expensive) fixed annuity contracts, are retirement income providers. They
are monthly income machines that you have paid dearly for but which may not be
adequate to cover your retirement expenses--- most of us will need more income
than our guaranteed benefits will provide.