Many of you know some of my backstory. Before I started working with HFG, 18 years ago, Donna and I were financial planning and wealth management clients of Paul Smeton’s. At the time, Donna and I had a young family, with Jacob and Ava being infants. I think that is important because I am just like you in that I have financial goals and aspirations, and I am an investor trying to save for retirement adequately. I am trying to build up my portfolio during my accumulation years, as we discussed in the money cycle, to transition to the distribution phase when I retire, and my portfolio will generate passive income for me and Donna. Passive income is income you get where you receive without trading your time and being compensated for that time.
As a wealth manager and financial planner, I am doing a lot of research, going to conferences, working with partners, and collaborating with our team to master retirement income planning. For our clients like you, one of the top things we do for you is help give the peace of mind and security of reliable retirement income. To me, you are used to a standard of living that you want to continue when you retire. You want to travel, help your family, renovate your house, buy cars, have fun, etc. Virtually all of that has a price tag.
I have to tell you that my thinking is constantly evolving as I read more research and listen to more experts. For a long time, I was in the camp that the only way to invest for retirement income was to use traditional investments like stocks, bonds, and mutual funds. I was biased against using insurance products, particularly annuities and cash-value life insurance. I heard what a rip-off they were and their high fees. I did not have them in my plans.
Within the last several years, I have found compelling arguments that the best outcome for retirement income planning is when one has a mixture of traditional investments combined with insurance. The accounting company Ernst and Young did a study about ten years ago and found ideal outcomes typically occur with 70-80% traditional investments and 20-30% insurance solutions. Furthermore, academics like Wade Pfau, Michael Fincke, Michael Kitces, Tom Hegna, and other thought leaders have similar conclusions. I recommend you buy the video called Baby Boomer Dilemma online for approximately $20. That is when I had an epiphany, aha, and a light bulb went off.
Here is what I realized for retirement income for me and Donna:
(1) I saw that at HFG because we work with many public sectors employees like teachers, firefighters, police officers, state workers, and Federal workers, they tend to have greater peace of mind because they have guaranteed income in the form of pensions. We work with a couple who are both federal employees. Their combined pensions are $250K a year. They do not need traditional investments like Thrift Savings Plans (TSPs), IRAs, Roth IRAs, and non-retirement investments for income purposes. They primarily work with us because of our tax management capabilities. The light bulb went off for me; they tend not to worry. Why don’t I have more of that for myself?
(2) Wade Pfau talks about how, as a rule of thumb, you should have enough guaranteed income to cover your essential expenses. Because Donna and I have only Social Security as our guaranteed income, I realized I have a gap between my guaranteed income and expenses critical to maintaining my lifestyle. The only way to guarantee contractually is to use income annuities. Essentially, I am transferring my risk to insurance companies who, through risk pooling and actuarial science, can more effectively manage the income and longevity risk.
(3) Finally, I do love stock investing. I firmly believe stocks are the best way to accumulate long-term wealth. However, as we have talked about with the bucket plan, it really should be for the later buckets. As a result, and the irony for me is that because I am using income annuities to cover the essential expenses, I can be more growth-oriented with other assets not earmarked for spending and can emotionally ride out the ups and downs of bear markets when stocks drop.
I share this with you not to say you should do what I do. However, many clients ask me. As an investor myself, I have learned to have a much more open mind and utilize the research of the best academic minds in our industry. If you have questions, please reach out to us.