Retirement planning saving for retirement

The Four Horsemen of Retirement Income

Defeating the Horsemen

Part III of III

This is part three of a three-part series entitled, “The Four Horseman of Retirement Income”. In part one we introduced you to the Four Horseman and briefly touched on how each of them can trample your retirement. In part two we fleshed out the risk each Horseman delivers.

Today, we will look at a basic retirement situation coupled with an example income plan. This plan is designed to defeat the Four Horseman of Retirement Income (longevity, overspending, inflation and sequence of returns risk), who can potentially upend your golden years if you are not properly prepared.

Sam and Pat: A Case Study

Sam and Pat are in their mid-sixties and looking forward to retirement this year. They have moderate spending needs and have built a solid portfolio from which to draw funds.  However, the pandemic and recent market volatility have left them concerned about their ability to generate a consistent stream of income. Will their money last as long as they do?  To which Horseman are Sam and Pat particularly vulnerable?

In the case of a couple just about to retire, sequence of returns risk must be mitigated. If Sam and Pat are dealt several years of poor investment returns right out of the retirement gates, they might permanently cripple their primary source of planned income. This feels particularly real to Sam and Pat as they remember the one-two punch of the tech bubble busting in the early 2000s followed by the financial crisis in 2008-2009. 

Planning Ahead to Reduce Risk

In talking with their advisor, Sam and Pat realize they can anchor a key part of their income needs around Social Security. Pat will wait a few years until age 70 to take her Social Security, boosting her payout to $3,700/month, while Sam will begin his Social Security at age 66 receiving $1,800/month.  What should they do until they reach those ages?  How can they reduce risk?  What if the market crashes? To alleviate that possibility, their advisor designed a ladder of fixed income securities to produce the income needed each year until Pat reaches age 70 and begins receiving Social Security. Additionally, Sam and Pat can also reduce some of the risk in their portfolio by reducing their equity exposure to ensure they have several years of distributions available even if the stock market declines. This strategy, combined with moderating their spending when necessary, all but eliminates sequence of returns risk.  

But what about the longevity and inflation Horsemen? Don’t they still pose threats? Sam and Pat’s primary spending needs are now being met by Social Security, which will last their individual life spans and provide an inflation adjustment annually. With Sam and Pat’s situation, longevity and inflation risks have now been greatly diminished. 

Of note, the overspending Horseman is still out there, and Sam and Pat agree that their biggest potential overspending threat could be large medical bills or Long-Term Care (LTC) needs. To help mitigate this danger, Sam and Pat both purchase a robust supplemental Medicare (Medigap) policy. Additionally, after reviewing their options, Sam and Pat decide to forgo LTC insurance. Instead, they decide that if custodial care someday becomes necessary, they will monetize or sell their home to access care of their choosing. 

Know Your Risks

Knowing what risks apply to your unique retirement situation is critical. The Four Horsemen are out there but can be rendered powerless with proper planning.  Act now to keep them from ultimately trampling what could otherwise be an enjoyable and productive retirement.

Don’t have a retirement income plan? Please click here to schedule a no-obligation consultation. 

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Jeff Rotherham, CFP®, MSAFP

Jeff Rotherham, CFP®, MSAFP

Jefferson Rotherham is a Certified Financial Planner® and Orion's Director of Financial Planning. Over the course of his career, Jefferson has developed and monitored hundreds of financial plans for clients in a wide range of circumstances. Prior to embarking on his career in financial planning, Jefferson served in the U.S. Navy for 20 years.

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