Two core groups that HFG serves are public school educators who worked in Harford, Baltimore, and Cecil counties and have pensions under the Maryland State Retirement System and Federal workers who worked on Aberdeen Proving Ground (APG) and Fort Meade and have pensions under the Civil Servant Retirement System (CSRS) and Federal Employee Retirement System (FERS). Matt Rehak’s wife, Carol, was a special education teacher in Harford County, and he sought to learn about her pension benefits and health insurance. She served as one of the core groups where he and Paul built the business. Additionally, due to our proximity to APG and so many folks who worked at Fort Meade and lived here in Harford County, this group organically became folks to whom we served.
In my 18 years at HFG, I have found that in serving these two groups, they have peace of mind, security, and happiness that most of us do not have. This observation has been backed up by academic research on retirement income. I reference Dr. Wade Pfau and read many of his research and books. His research has shown that when people have enough guaranteed or promise-based income to cover their essential expenses, they have greater security. They generally do not need to rely on their investment portfolios, which can be volatile for income needs. The ups and downs of the stock market have typically no to minimal impact on their day-to-day cash flow and spending needs because their pensions, and, for a lot of them, combined with Social Security, meet those needs. This has been backed up by other thought leaders like Dr. David Blanchett, Dr. Michael Fincke, Tom Hegna, and Michael Kitces.
So what do you do:
(1) If you work in the public sector with a pension, understand the magnitude of that pension benefit. If you did the economic value of that pension over the lifetime of retirement for you and your spouse, that benefit could be worth millions. We can help you better understand. Most important for us is if you have a spouse, make sure you choose the appropriate survivor option when you retire so that if you pass away before your spouse, what benefit do they receive? Another thing about public sector pensions is that they usually have cost of living adjustments (COLAs) that dramatically improve the economic value.
(2) If you work in the private sector and have a legacy pension, understand its value. Currently, virtually no private sector or healthcare organization offers new pension benefits to employees. Most of these organizations have frozen pensions or grandfathered people who started long ago. They generally do not have COLAs. Like in the public sector, it is essential to understand your options for you and your spouse.
(3) If you do not have a traditional pension, do not despair. There are three things you want to consider:
(A) Social Security likely provides you and your spouse the only guaranteed or promise-based income. You want to work to optimize for you and your spouse. This is one area we specialize in. Every year, you wait between 62 and 70, which is guaranteed 7 to 8% on your benefit, and no investment product can replicate this, especially since SS offers COLAs as well.
(B) You may consider using an income annuity that provides guaranteed income. The only way to get contractual guarantees for lifetime income from investment products is through income annuities. I know what you say: “I have heard annuities are bad, and I should not buy them.” I used to have this view and bias until I researched them. For Donna and me, I calculated how much-guaranteed income I wanted in retirement and how many income annuities I needed to meet my essential needs. They are strong because you pool risk and have an insurance company manage the investment risk. My friend Greg says best, “You can hate annuities but like what they do.”
(C) If the thought of an income annuity or insurance products galls you and there is no way you would ever invest in one, the next best alternative for us is using the time segmentation and the bucket plan. The bucket plan divides money in now, soon, and later buckets. Individual bonds in soon bucket for spending within 10 years. They do offer guarantees on rate of return and getting principal when the term is up. A portfolio of stocks, bonds, and mutual funds do not have guarantees like the annuity but managed effectively can provide reliable retirement income.
There you have it! We have seen that the more guaranteed income people have, the happier and more secure they tend to be.
Please contact us if you need help integrating a holistic wealth management plan that combines all these pieces.
Adam Freeland, Certified Financial PlannerTM and Chartered Financial Consultant®
Registered Representative and Investment Adviser Representative
CRPS, Chartered Retirement Plans Specialist
Accredited Investment Fiduciary®
CLTC, Certified in Long Term Care
RICP, Retirement Income Certified Professional