One of the goals of Harford Financial Group is to become a world-class holistic wealth services firm. As the firm's leader, the passion to achieve a lofty goal like this drives me. I am reading a book on the late Kobe Bryant of the Lakers. His desire to be great and do his best stood out for me. Every day, I wake up and want to be the best I can be as a professional. That requires me to be growing and learning constantly. At our heart, we are a research organization continually tapping the minds of top professionals in the five pillars of holistic wealth management: retirement income and cash flow, asset management, asset protection, legacy and estate planning, and tax management. Our biggest focuses are retirement income planning and tax management. Melissa Mullan and I, in addition to being Certified Financial Planners (CFP), also achieved the Retirement Income Certified Professional (RICP) through the American College. We are both proud of the designation. It was a comprehensive three-course designation. The analogy is that the CFP was like us going to medical school, and RICP was our residency like doctors take.
With all this in mind, we are constantly researching retirement income. The preeminent expert on retirement income planning is Dr. Wade Pfau. I bet you did not know they offer Ph D's in Financial Planning. I jokingly say that Wade would fit nicely with the Big Bang Theory. He is brilliant, and I have read many of his research and books. He and a colleague developed the Retirement Income Style Awareness (RISA) Matrix in the last several years.
As you look at the below graphic, I want you to focus on the difference between probability and safety on the right and left-hand sides. I am going to focus on 3 of the areas: total return, time segmentation, and income protection. I will not cover risk wrap because it is rare. To understand, one must understand the history of retirement income. From the 1940s through the 1970s, the traditional defined benefit pension was popular. Unfortunately, in the 1970s, most organizations realized they could not afford them long-term. The private sector has largely phased them out. We only see them with our clients in the public sector and some private sector firms like Verizon, which had them but have phased out for newer employees. In the 1970s, organizations switched to the defined contribution 401k, 403b, and TSP programs, where employees invested predominantly in stocks, bonds, and mutual funds through pre-tax savings and employer matches.
Total Return: Since then, the employee has invested mostly in stock and bond mutual funds and typically had a percentage in each during the accumulation period. Most people have been trained to do the total return approach. When they were younger, they could afford more volatility when markets crashed because they had time. As a result, they had a higher percentage in stocks. You may have heard us say your portfolio is 70/30 or 60/40. The first is the percentage in stock funds, and the second is the percentage in bond funds. As you transition closer to retirement, typically, people reduce the percentage in stocks towards bonds to reduce the volatility. As you move to the distribution phase, you can take out a certain percentage, roughly 3-5%. The assumption is that you take out a certain rate but will earn a rate that allows you to keep the principal intact and essentially live off the interest. This is what most people are taught and know. For a long time, this was exclusively what we communicated.
Time Segmentation or Bucket Planning: As many of you who work with us know, we talk a lot about bucket planning, which is essentially time segmentation. You divide your money into three buckets: the now, soon, and later. Now is what you need for the following year. Soon is what you need for 2 to 11 years, and later is 11 years and beyond. Investing is difficult emotionally, and time segmentation helps add an element of safety by segmenting money into three buckets. The now and soon buckets allow investors to buffer their money from volatility for cash they need within the next 11 years while keeping up with inflation. It provides stability. We have found clients like this safety approach.
Income Protection – People like guaranteed income!!! We work with many public sector employees: teachers, firefighters, police officers, federal workers, and state workers. The common thing they have is a traditional pension. They tend to be less stressed because they know they have that guaranteed income, and as long as they live, they will have that income. It is very reassuring. For those of us in the private sector, those traditional pensions essentially do not exist. What are our options? We can get guarantees from bond ladders or guaranteed income from income annuities that act like private pensions. Mutual funds do not offer guarantees. Many of our clients like doing this for a portion of their assets to raise their guaranteed income, anywhere from $10 to $50K a year, based on their circumstances.
What is your Retirement Income Style? You can find out now. Go to this link and register. It takes about 10 to 15 minutes. If you do not understand the question, just give your best case. Don't overthink it. We have found it to be a useful tool for ourselves and helping our clients. We recommend couples take it separately because oftentimes they can have different styles, which is important to know.
https://account.myrisaprofile.com/invitation-link/Y1XT0SD0D7
We want to be the best and serve you! By researching things like this and educating you on your options, we feel good about what we do!
Disclosure: All guarantees are backed by the claims paying ability of the issuer.