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Climbing the Retirement Mountain

October 15, 2015

healthy-income-streamsThe act of retiring has spawned a legion of metaphors, with witty people describing it as everything from a "vacation in Vegas" to the "world's longest coffee break." The act of saving for retirement is admittedly thinner on colorful literary comparison, but an accurate likening would be a mountain climb.

When you scale a peak, a safe descent is just as important as the trek up. Likewise, when you save for retirement, the accumulation (or pre-retirement) phase is critical, but so is the distribution phase because it determines how comfortably you'll live for the rest of your life.

To successfully build a retirement income stream, where you take your assets and transform them into ongoing income after you stop working, consider these tactics:

  • Focus on distribution rates. For many people, how much they put into a 401(k) or other account is their primary concern. They focus almost exclusively on how much they can bank in their retirement accounts. However, to truly build a nest egg, concentrate as much on distribution as you do accumulation. Focus your distribution strategies while you're still in pre-retirement, and opt for low default distribution rates if you don't have any alternatives.
  • Rethink your 401(k). Before the 401(k) became popular, people accumulated wealth through pension plans, where they worked many years at the same company, retired and enjoyed a steady, set amount each month to cover life's expenses. Over time, companies stopped paying pensions and shifted to 401(k) plans, which are essentially savings plans.

    Unlike other investment plans, 401(k) plans are generally inefficient at creating retirement income because they rely on employees to make regular contributions, and they only go the distance with small withdrawal rates. The employer-matching aspect of a 401(k) is a strong draw, but it still might not be the best use for all of your assets.
  • Adjust your investments for inflation. If you need the spending power of $100,000, how much will you need to make in 20 years? Assuming inflation stands at 3%, two decades from now, you'll need $180,000. Inflation can hit retirement income—especially 401(k) plans—extremely hard. And for many people who rely on that income, especially when they have to take small withdrawals, that's simply not enough to live comfortably.
  • Focus on four retirement goals. Whether you take an insurance or investment-based approach to building robust retirement income streams, you should always focus on four key goals: lifestyle, longevity, liquidity and legacy. How you'll live and how long your money will last are the first two. The last two address arranging your investing so that you have access to funds when you need them, and your legacy, what you have planned for your money after you die, whether you'll leave it to your family or donate it to a cause.

    As with any portfolio or investment approach, balance is essential. These four retirement goals should be repeated like a mantra because they cover every essential angle of successfully saving for the future.

Prosperously planning for retirement is so much more than asking "Where should I invest?" or "How much should I save?" Developing healthy income streams can help provide a safe trek down the retirement mountain, where you have the financial strength and security to navigate your financial journey to the end.