What happened to happily ever after? That’s the question posed by industry expert Tom Hegna in his new book, Paychecks and Playchecks. As Hegna explains, “with the crazy financial markets of the last decade, most people feel that a story-book retirement is no longer possible.”
Hegna says it doesn’t have to be that way. Even though we live in uncertain times, there are guaranteed income streams that advisors can point out to their clients and prospects. I recommend this book to advisors for its sound, practical advice.
In short, Hegna’s able to take some pretty complex topics and make them easy to understand. One such topic is the idea of “distribution.” As Hegna writes: “How you draw down and distribute your retirement savings once the bell sounds and your career is over will determine whether or not you run out of money.”
Hegna makes the following points to convey to your clients when discussing this “distribution dilemma.”
- Accumulating money may be the easiest part of retirement. Start early and save as much as you can — 15 percent of your income would be a good start.
- Understand that longevity is not just a risk in retirement, it is a risk multiplier of the other risks.
- The withdrawal rate risk is the risk of running out of money by taking too much out of your retirement savings each year. A 2 percent withdrawal rate is considered bulletproof; 3 percent is safe. Withdrawing 4 percent or more a year can cause your portfolio to run out of money.
- The riskiest time to invest is right before or right after retirement. A loss during these years can have a devastating impact on your retirement savings.
- Inflation is a risk that increases over time. With the amount of money the Federal Reserve has printed and injected into the economy, if we get any money velocity (increase in economic activity) we could see significant inflation.
- Deflation may be the biggest risk in the short term. Governments around the world are cutting budgets and benefits. Housing is still a mess. Unemployment and underemployment are too high — all of this is deflationary.