An impressive year in the stock market concluded the decade with a bang, which means it is a good time to ask yourself, “Are my retirement plans better off in 2020 than they were a year earlier?”
Along with a Dow Jones above 28,000, we have witnessed two other noteworthy events: Advisory firms are developing lower-cost strategies to help you spend that stock market windfall in retirement. And the government has made it easier for employees to turn their savings into pension-like lifetime income.
All three events become valuable to you depending on how you view your retirement finances.
- Do you plan on drawing down your savings and hope they last longer than you do? (This approach is known as “deaccumulation” — or the opposite of accumulation.)
- Or do you want to create a retirement income plan that lasts your lifetime? We call it “income planning.”
Did Congress Actually Agree on Something?
Yes, and it is called the SECURE Act. Congress and the president approved legislation (that I have long argued for) to allow 401(k) plans to more easily add annuities as a retirement plan option. Under the SECURE Act, retirement plans now have a “safe harbor” from being sued if annuity providers go out of business or stop making annuity payments. Now that it’s less likely they will be sued, employers may open up to annuities.
The legislation also requires employers to show once a year how much each employee’s savings would produce in terms of retirement income. That is an important bit of information – and something anyone can learn by putting their own numbers into the Income Power calculator at Go2Income.
One part of the SECURE Act that people are grumbling about is a change of rules that will allow the government to collect taxes more quickly on 401(k) and IRA savings left to heirs. Long before the act became law, I suggested a different way to provide a legacy for your heirs. It was to “die broke” in your 401(k) to help your heirs avoid those taxes, and to “die rich” in your personal savings, which mostly escape taxes at your passing. (By “die broke” I mean that in the long run, the income from a rollover savings account is coming from annuity payments and not withdrawals.)
Overall, the SECURE Act is good for people planning for retirement – an instance of government representatives working for our benefit.
Robo-income Solutions Announced: But Are They New?
The New Year has brought the usual onslaught of product claims from financial companies. One large provider is offering a low-fee “robo” (do it yourself) solution for what I consider a very traditional planning method of asset allocation/withdrawals/Monte Carlo simulation. That is the popular approach of dividing your savings into categories that usually include stocks, bonds and cash, and stress-testing to see how long withdrawals of these savings will last.
The problem, as I have often said in this space, is that asset allocation does not start with the most important aspect of retirement – your income. By not considering all the ways of generating income, including annuity payments, this method shifts the risk to you, and misses out on a lot of tax benefits.
Consumers can educate themselves by comparing the results of asset allocation and the different approach of income allocation, which helps you get the most retirement income from your savings. My conclusion is, robo-income planning is good because it maximizes the efficiency of a plan you create. Low fees are good, too. But the best robo plans move you away from de-accumulation and toward true income planning.
Market High at End of Year – How Much Better Off are You?
This could be the year that consumers not only celebrate and bank their savings but also discover the best way to make their money last through retirement.
The Income Power reports generated by Go2Income reveal the reality: most of us are only slightly better off than we were a year ago. That’s because
- We were not invested 100% in the stock market.
- Interest rates on other financial products fell over the year.
The result: Your Income Power is increased, but by a small percentage.
The only regret for some is that perhaps they didn’t invest enough and missed the boom in the market. The next regret for many may be overinvestment as the market corrects. I won’t try to predict the top or the bottom, and you shouldn’t either.
That’s why an Income Allocation plan works for most people, especially retirees. As I have shown recently, severe drops don’t materially affect the planned income of those who follow an approach of income allocation.
How the Three Events Tie Together
- New legislation moving 401(k) plans in the direction of income.
- New financial products often don’t follow income
- Market results barely move future retirement income
My observation is that income/income/income is the answer to a secure retirement.
I invite you to visit the Income Allocation Tool at Go2Income to start your plan, ask questions and then, make some decisions about what is best for you and your family.