You know about the Three R’s of schooling — reading, ’riting and ’rithmetic – that continue to form the foundation of education even as it becomes much more complex and sophisticated.
There are also “Three L’s” that are just as foundational as you plan for retirement: Lifetime Income, Liquidity and Legacy.
These Three L’s address your objectives, and will drive your investment strategies and tactics. Just like a business plan, if you prepare and decide first on the objectives of the Three L’s¸ you will significantly improve your chances for a successful retirement.
Most people typically worry less about dying after they retire than about running out of money. That’s why it’s essential to secure income for the rest of your life, no matter how long (rather than devising a plan that will provide income only for your anticipated, but unknown life expectancy). Your Social Security payments and any pension benefits may be the base for this number. If they add up to enough income, you are done with this goal — maybe. If not, you will have to develop tactics to reach a number that allows you to live comfortably no matter how long you live.
Lifetime Income is the goal you should look to secure first. Your plan should ensure that your income continues year after year, even if it requires you to adjust the numbers so that you live on less, and/or your legacy to your heirs is reduced.
You needn’t hit this target when you retire, but should have a plan that gets you there by what we call your “no worry age.”
Liquidity involves the financial resources that can be readily converted to cash to meet expenses that go beyond those supported by your Lifetime Income. That cash can come from bank accounts, a Roth IRA, or even equity in your home. In retirement, your costs for unreimbursed medical expenses, a caregiver or other surprise events (not to mention occasional unpleasant events like a new roof) could be substantial. Your level of comfort will be higher if you have a cash cushion.
A legacy could come from liquidity that you don’t use during your lifetime, or it might be a financial asset dedicated to the legacy, e.g., an insurance policy that you pay to keep in force. Money invested in stocks and bonds outside your rollover IRA or 401(k) is a good source for an inheritance because it receives favorable tax treatment at your passing and shifts investment risk to your heirs, and typically they will have more years to deal with it than you do.
I list legacy as the last goal for an obvious reason: You should take care of yourself and your spouse with income and liquidity to ensure a reasonable retirement and only then consider an inheritance to the kids and grandchildren.
Tactics after strategy
The problem with certain planning approaches is the focus on tactics before strategy and objectives. For example, they might focus on asset allocation strategies first — like the “rule” that your investment percentage in stocks should be 100% minus your age, or the 4% withdrawal rule — before deciding on the objectives. It would only be by luck that these tactics meet your objectives.
If you plan for the Three L’s and you discover you haven’t come up with enough Lifetime Income or Liquidity, make adjustments. When you are satisfied that the numbers add up, you can begin to look at the tactics for achieving your goals.
To figure out how to quickly add Lifetime Income to your plan, look at income annuities. They are the only financial products that guarantee income for the rest of your life — similar to Social Security or a pension. An income annuity can supplement your income as soon as you retire. A deferred income annuity offers payouts at an age you choose. A Qualifying Longevity Annuity Contract, or QLAC, offers tax benefits if you purchase it from a rollover IRA or 401(k).
No matter what solution best applies to your specific circumstances, understanding the Three L’s of Lifetime Income, Liquidity and Legacy will help you develop your retirement plan — and select the right set of strategies and tactics.
You can ask Jerry directly about your retirement ideas and objectives. Submit your question to him at Ask Jerry and he will answer you himself.