How to proceed, depending on what you want
I tuned in to a webcast recently, featuring Dr Wade Pfau and Bob French, two of the principals of Retirement Researcher (https://retirementresearcher.com/). (I know Wade – he’s one of the people I thank at the end of Life Two for his wisdom that contributed to my own education.) They are launching their Retirement Researcher Academy. I was hoping to get clarity on what they call their Retirement Income Style Awareness (RISA™ for short), as it has features that appear to be very useful. As it happens, I didn’t get the clarity I wanted, but that was because it wasn’t directly the subject of the webcast.
Regardless, I gather that at least one aspect of it helps you to understand how much certainty you want in your retirement income. And that’s a very good thing to understand. In my Blog Post # 69 (http://donezra.com/69-with-two-extreme-philosophies-either-or-is-a-bad-way-to-frame-the-choice/) I cited both Wade and Dr Moshe Milevsky in saying that seeking pure safety and seeking pure growth are at opposite ends of the spectrum, and having some of each is a much more sensible choice for most people. Helping you clarify how much of each suits you best is, I think, a very desirable insight.
(Full disclosure: I have no commercial relationship with any of the people or organizations mentioned.)
In Life Two I help you to think through some aspects of how to decide where on the spectrum of choice you’d like to be. But as I listened to Wade and Bob, another way to present the choice occurred to me. I’ll bet that at Retirement Researcher they’ll go more deeply into the subject, and help guide you to a sensible decision, because they’ve studied so much about the subject and have refined those studies into valuable insights. But for this post, let me tell you what occurred to me, after listening to them.
Start with the fact that there’s never a “right” answer. (You’ll know by now that I intensely dislike the word “right” in this sort of context, as if there is a single answer that’s perfect and every other answer is not only imperfect but wrong.)
That’s partly because you’re never entirely certain about how you feel. But even more than that, even if at this moment you know exactly how you feel, the fact is that over time you’ll change, your circumstances will change, life and society will change. So even if you can tell what’s “right” today, it won’t stay right forever.
Fortunately, if you’re reading this you’re an ant rather than a grasshopper, as in the well-known fable. You’re willing to take the time and spend some effort to understand the issues and come to conclusions and make decisions, and that will stand you in good stead for the future.
Following the ideas that Wade and Bob put into my head, I’ll start by having you ask yourself the question: how much certainty do you want, and what form of certainty appeals to you?
I say “how much certainty” because it’s impossible to get complete certainty. For example, you can’t protect yourself against inflation totally. You can’t be sure your health will always remain good. You can mitigate the impact those conditions have on your finances, but you can’t avoid them with certainty.
What then are the things about which you can seek degrees of certainty? And what are those degrees of certainty?
Start with degrees of certainty. I think of: as much certainty as is possible; partial (a vague word, I know) certainty; and willingness to take a chance.
Look at your future lifespan, as one of the areas relevant to retirement income planning. It’s the obvious area to start with, for me. As I have shown (http://donezra.com/freedom-time-happiness/the-trail-for-enthusiasts/ – T-04), once you’re around 75 years old, lifespan uncertainty causes greater uncertainty in your sustainable income than being 100% invested in equity investments. In addition (http://donezra.com/67-happiness-comes-from-certainty-about-not-outliving-your-assets/), typically our biggest fear is outliving our assets.
If you’re looking for as much certainty as possible, the solution is to buy a guaranteed lifetime income contract (http://donezra.com/freedom-time-happiness/the-trail-for-enthusiasts/ – T-05). Short of insurance company failure combined with no recourse though mutual support across insurance companies, that’s pretty certain.
You can buy a contract for all your projected income needs, but it won’t be totally inflation-proofed. (Such contracts are too expensive to offer.) But you can probably get a contract which guarantees some specified rate of increase each year, like 2% or 3%.
In the “partial certainty” category, there are two possible ways to go.
One way is to buy a lifetime income contract that guarantees some proportion of your projected spending, but not all of it. That way, you have scope to seek growth with the rest of your assets. An obvious amount is the income you need for essential spending, leaving the desirable (“nice to have”) spending dependent on how much growth your assets generate.
That approach splits your income projection into two parts, and insures one part.
The other approach divides your lifespan into two parts. One part is to some reasonably advanced age (let’s say 85, as an example), and the other part is the lifespan beyond that age. And you buy a guaranteed lifetime income contract now, that starts after you reach that advanced age and continues after that for as long as you live. And obviously the advanced age is one you’ll have no more than a 50/50 chance of reaching: in other words, you’re protecting only the most uncertain portion of your future lifespan.
(Let me note that these “advanced life deferred annuities” or ALDAs or whatever other name they go by are not available in all countries.)
There’s one other form of time segmentation I’ve written about (for example, http://donezra.com/85-a-case-study-on-the-investment-glide-path-in-decumulation/).
Here you start with an investment horizon. It may be the time to the advanced age in your ALDA contract. Or, if you haven’t some form of guarantee that provides lifetime income, whatever advanced age you’re planning to provide your own income for – for example, the three-quarters longevity point (http://donezra.com/12-how-long-should-you-plan-to-make-your-money-last/).
And you invest for growth in your assets.
But you’re aware that, if you’re unlucky and you encounter worse than average returns early in your retirement (http://donezra.com/83-sequence-of-returns-risk-in-decumulation/), it could have a permanent bad impact on your income. So you decide to segment your assets into two buckets. The first is where you’ll draw your spending money from in the early years, if growth-seeking returns are poor, to give those returns a chance to reverse without it affecting your spending. In other words, asset preservation, to the extent possible. And the rest is purely growth-seeking. For example: five years of spending in the safety bucket and the rest in the growth-seeking bucket.
So you see, there are many forms of near or partial certainty, and there’s no one-size-fits-all implementation solution.
And there are many ways in which you can implement solutions. You can do it yourself. You can do it with the help of other/expert input. And you can place yourself in the hands of experts. (For clarity: I don’t offer any such services.)
I’ve written a lot on these subjects, because they’re so important to your finances. I’ve also written a lot about your Personal Funded Ratio (several chapters in Life Two and Freedom, Time, Happiness, not to mention numerous blog posts). And that’s also a concept that they use at Retirement Researcher. All in all, they’re a team I have a lot of respect for.
There are degrees of certainty you can seek, as regards lifetime income and short-term asset preservation.
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.