Caleb J. Callahan, CFP, recently spoke at an industry meeting. He discussed the need for planning both before and after retirement takes place, specifically distribution planning. I wanted to share his wisdom with you.
He advises that you should build a customized Retirement Income Survival Kit or RISK. This is a retirement income blueprint that optimizes the use of your retirement resources while minimizing the risk of outliving them. A RISK provides specific advice about how to invest your assets to meet specific income goals while protecting against six key risks you will face in retirement.
Once you retire and begin to tap your retirement income, you will invariably face a number of these risks:
- Market risk – losing your savings
- Longevity risk – outliving your assets
- Inflation risk – uncertainty of changing inflation in areas of spending
- Liquidity risk – flexibility to access cash
- Health risk – health care expenses
- Legacy risk – ability to pass on assets at death
Once you understand these risks that you will face during retirement, you should rank them in order of importance. After that, you need to answer “yes” or “no” as to whether your current investment portfolio adequately addresses each of these risks. This will help you focus on a key consideration: What do I need to do to address these risks and make sure I can achieve my goals?
The next step is best taken with the help of your advisor (or if you don’t have one, you can search for one here). He or she can help you better understand the risks and engineer an income plan. That means constructing a retirement income allocation model, which will be the basis for your retirement income blueprint.
According to Callahan, an income allocation model must include everything in a traditional asset allocation plan, but it takes a step back to more effectively address the six key risks. For example, an income allocation model not only includes the traditional asset management diversification, it must also include diversification among equity income guarantees, longevity insurance, inflation protection, long-term care coverage and death benefits.
There is no single product that addresses the six key risks of retirement, so the idea is to diversify among different products, including the risk based products, during the retirement years, to effectively address them all.
Again, your advisor is key during all of this. It’s their job to help you understand the different components and products that will make up your plan.
The final step is execution. It’s important to have a plan that you can truly understand and follow. A nice but complex plan that sits in a drawer untouched doesn’t do you any good. We are entering the age of personal responsibility for our own financial well-being. This is a good blueprint to help you begin to do that.