The Two Stages of Money in Retirement
Are You Still Accumulating Assets or is it Time to Shift Your Focus to Asset Preservation?
At Peak Financial Freedom Group, we believe there are a distinct set of seven rules to live by in order to create retirement security. Today, we’re sharing the first lesson, which is that there are two stages in retirement planning when it comes to money. We detail all seven rules in our book, Momma’s Secret Recipe for Retirement Success.
Stage One of Retirement Planning: Asset Accumulation
The first stage of retirement planning is one you likely know very well. It’s called Stage One of Retirement Planning – Asset Accumulation. Stage One is when you’re working, making a salary, investing monthly, and have many years until retirement.
During Stage One you want the maximum growth you can get from your assets, are tolerant of high volatility, will accept large losses, will continue to make contributions, have plenty of time on your side, and don’t need income from your assets for many years. Basically, in Stage One, you can handle a high level of risk.
Most retirees we meet, many at age 60, 65, 70, and even 75, are still in Stage One mode. You, or your current broker, might have done a great job accumulating assets up until this point in time, and you might have gotten a little bit lucky with the Bull Market thriving for a decade before COVID-19 hit. With the market recovering and life beginning to get back to normal, you are probably continuing to do most of the same things with your money that you did when you were young and working, in many cases taking a lot of risks and not creating an income plan.
Why it’s Important to Move Out of Stage One
For Stage One to be the proper planning methodology for you once you are retired, you need to be able to say you are perfectly comfortable not making your previous salary, it doesn’t bother you that you are not investing money every month like you used to, you have no issue with high volatility, you are not afraid of large losses, you feel you have enough time to make up any large loss, and you don’t want or need income from your assets for a long time. We believe very few retirees can say all these things are true. Can you? Can your spouse?
Here is the issue – if you are retired, or within five to ten years of retirement, you should have already transitioned out of Stage One and into Stage Two of Retirement Planning – Income Distribution and Asset Preservation. Here’s why:
- If you are retired, ask yourself if you suffer through another market crash like 2008 or 2020, will your retirement be unaffected by the loss? Will you feel safe taking the same amount of income out of your assets and feel confident your income won’t run out? Will you feel secure things will still work out if the stock market crashed -50% again? If you are retired, how will your spouse feel?
- If you are within five to ten years of retirement, ask yourself if you suffer through another stock market crash like 2008 or 2020, will you be able to retire on time as planned or will you have to work longer — a lot longer? Will your projected future retirement income be unaffected by the loss? How will you feel if you have to work ten more years instead of five more years? Will you feel safe taking the same amount of income out of your assets and feel confident your income won’t run out? Will you feel secure things will still work out if the stock market crashed -50% again? If you are within five to ten years of retirement, how will your spouse feel?
Stage Two of Retirement Planning – Income Distribution and Asset Preservation
Stage Two should begin when you are retired or are within five to ten years of retirement:
- You are no longer making your big salary.
- You are no longer making any monthly investments into your 401(k)/403(b)/457/SEP.
- You want and need maximum security.
- You do not want much volatility at all.
- You cannot tolerate any large stock market losses.
- You need to create the maximum amount of income and make sure the income is guaranteed to be paid to you and your spouse, if married, for as long as you both live, and the income must be available immediately or at a specific time in the future.
In short, you can plainly identify some of the differences between Stage One and Stage Two. You can’t use the same strategies, you can’t use the same assets or allocations, you can’t use the same planning techniques, and you can’t use the same advisor for both strategies. Over 99% of the retirees and pre-retirees we meet with are still in Stage One of Retirement Planning – Asset Accumulation mode. As we said, you or your current broker might have done a great job accumulating assets up until this point in time, and you might have gotten a little bit lucky with a bull market that was thriving longer than anticipated before COVID-19.
Why Stage Two is Crucial
Remember, -40% market corrections happen every seven years on average since 1929, so you’d better protect your assets against large losses. If you are retired, or within five to ten years of retirement, and you haven’t already transitioned from Stage One into Stage Two, this simply means your assets may not be positioned properly. If you have an advisor, it means he/she may not be solely looking after your best interests. Many advisors specialize in helping you to accumulate assets for retirement (Stage One). They are experts in asset accumulation; it is how they were trained, it’s what they are good at, it’s what they like to do, but they may not be experts in Stage Two of Retirement Planning – Income Distribution and Asset Preservation. If you’re still stuck in Stage One, you need immediate help from an expert in Stage Two. The history of the financial industry is that it was built based on the concept of asset accumulation.
If you want to make sure you can move confidently into Stage Two of Retirement Planning – Income Distribution and Asset Preservation, contact us today!