Managing Retirement Income
Written by Jim Englert
During my working years, I have witnessed a revolutionary change in the way retirement income is planned and how it is managed. At Kodak, my retirement counseling experience began in the late 1970s when I counseled employees on the various retirement options available. None of these options included lump sums at that time; only lifetime monthly payments were available. The only decisions necessary were to determine the start date of the payments, and whether or not to take a reduced benefit in order to provide continued payments to a spouse in the event of the retiree’s death. In most cases these employees were approaching age 65, and it was fairly common to begin their Social Security benefit at the same time. In retrospect, what stands out the most is that retirement income was understood, reliable, provided and expected.
Times were simpler then. The manager of the pension plan managed the assets in the plan to ensure that all pensioners would receive the promised payment amounts for their lifetime. In addition, the Pension Benefit Guarantee Corporation (PBGC), guaranteed a vast percentage of these promises.
Beginning in the 1980s, retirement as a concept began to change. Companies began using the idea of early retirement as a way to manage employee levels. Incentives for early retirement were offered. Employees began to contemplate the possibility of retirement ages much younger than in the past. As appealing as this sounds, the reality was that pension managers were ill prepared to fund longer retirements on the scale that was being considered. This led to many of the funding problems that caused a great shift in employer provided retirement benefit plans 20 and 30 years later.
In the meantime, the 1990s introduced the option of taking retirement benefits in the form of a lump sum. This idea effectively transferred the responsibility of managing the underlying investment from the company pension manager directly to the retiree. The 1990s were the perfect time for all of this to happen because the markets were on an unprecedented bull run. Interest rates started coming down from where they were in the 1980s, but still provided reasonable rates of return. Due to these factors, the perception of a secured early retirement through success in the investment markets was high.
The 2000s found many companies discontinuing or modifying their pension plans. Most new retirees in current times do not have the security corporate pensions provided in the past. The retiree is truly on their own for the management and planning for the funding of their retirement years. Since 2000 we have experienced two very substantial declines and recoveries in the investment markets. The 2008 decline caused the Federal Reserve to reduce interest rates to close to 0% until very recently. This has kept bond interest rates much lower than normal. Uncertainty seems to plague investors and we hear the statement ‘it’s different this time’ all the time. True or not, the only thing that can be proven is that no one can predict the future. It is undeniable, however, that the responsibility for managing cash flow sources and spending has shifted to the individual retiree.
In today’s environment, the act of retiring takes more careful planning than ever before. At High Falls Advisors, we have a detailed approach to this retirement issue. We start with a thorough analysis of your expected expenses, helping you to identify those that are essential and those that are discretionary. Next, we review your Social Security income, planned part-time income, pension payments (if any), and any other type of cash flow providing income to cover your expenses in retirement. The shortfall between income and expenses is the amount that needs to be funded by your retirement savings. The next step is to identify investment strategies that connect short, intermediate and long-term expense needs with your retirement savings, taking into account your risk tolerance and other elements of your personal circumstances. Planning for this shortfall has become a critical element of the retirement planning process today, due to the shift in responsibility for retirement savings from employer to employee.
I have seen a lot of change in my 40+ years of working with retirees, between the shift in employer paid benefits, interest rates and stock market volatility, among others. The one thing that has stayed the same all these years is the need to identify priorities, goals and partner with someone who can help build a plan.
Whether you are decades away from retirement or you’re already retired, all ages can benefit from this process. Working together to develop a strategy unique to your situation, you may find more confidence as you embrace the increased responsibility of managing your retirement income. We will be hosting seminars and offering more information on how you can engage in this process in 2017, and we hope you’ll join us to learn more. As always, please contact your advisor with any questions or feedback.