Author: Nahum Daniels

Retirement is a unique stage of our lives that at this writing can last a third or more of the years we strut about on this earth. It has its own financial dynamics, different from earlier stages primarily focused on accumulating wealth. Retirement planning is primarily about spending down the wealth we’ve accumulated. That’s why how we manage our retirement wealth, referred to colloquially as our “nest egg,” differs diametrically from investment approaches we may have applied earlier when achieving our other financial goals.

In a nutshell, retirement planning is about generating replacement cash flow. When you stop earning income, those missing paychecks need to be replaced by regular payments from other sources if you want to continue to sustain the lifestyle to which you aspire and/or have grown accustomed.

Thus, in retirement, cash flow is king, but it’s not just any cash flow. To win at the game, retirement cash flow has to meet seven challenging requirements:

1. It must last a lifetime—or two lifetimes if you have a spouse or significant other you care about. But longevity increases with each passing year, so the duration of your retirement income must be open-ended. You simply don’t know how many years you may have.

2. Running out can mean literal ruin, so If you can get it, you want that life-long income to be guaranteed. Say what? What does a “guarantee” even mean in today’s financial world?

3. Retirement income must be impervious to market volatility and losses. The vagaries of global financial markets—including bond markets— must not be allowed to reduce it, because once reduced it’s hard to recover prior levels.

4. Somehow, your retirement income needs to increase to keep up with inflation averaging at least 2% to 4% a year. Without compensating for that erosive force, your purchasing power will lose ground, i.e. you will grow poorer. A fixed income—the same amount paid year in and year out like a pension—simply won’t cut it.

5. Your core income should be at least enough to sustain your desired consumption, i.e., your lifestyle. In our economy, you don’t want to stop consuming. While you can, you need to keep doing so for your own sense of pride; the economy needs you to consume because consumption is its life spring.

6. Ideally, your growing income floor should be reliably under your personal control, pouring out of your properly invested nest egg. This makes you self-reliant. Facing an age of acute uncertainty, you want to be self-reliant.

7. Your core income floor can then be supplemented with cash flow from other sources, like Social Security and a Pension, to create a surplus. If you can see to it, your guaranteed lifetime income should be more than you (think you) need so you can feel free to be generous to yourself and others—without living in constant dread of depletion.

Sounds like a tall order, doesn’t it? That’s because generating “free cash flow” in retirement in the form of guaranteed surpluses is just that. If you think you can do it yourself, good luck. If you’re working with an advisor, make sure he or she knows the real objective and can show you how to achieve it. The good news is that thanks to some of today’s most ingenious financial innovations, it can be done.

Winning at retirement means playing the long game, the very long game.  Planning ahead, through saving and investing, is essential to fund a “nest egg;” positioning your nest egg to protect it against untimely losses while compounding adequate returns secures it; eventually  converting your nest egg into a personal pension focused on maximizing lifetime income gets you to the finish line.

As true as the foregoing formula may be for males, it’s even truer for females. As a rule, women outlive men.  That’s why when we dig deep we discover that retirement planning is really about providing for spouses and significant others.  That was certainly the original intent of the Social Security program when it was initiated in 1934; its purpose was to protect survivors from destitution rather than to sustain workers on a decades-long golf outing.  Alas, improvements in life expectancy and the unbridled generosity of politicians building a welfare state have transformed the Federal government into a huge insurance company—with taxing power and a standing  army.

Which brings us to one of today’s greatest headwinds facing contemporary baby boomers.

I’m referring to our national debt and its service.  Both the debt itself and the cost of maintaining it are unprecedentedly high and persistently growing.  What’s often  missed in their exposition are the threats they pose specifically to retiree security.

So allow me a few words on the subject (for more cf. Chapter 5, “The Money Makers,” in my new best seller, Retire Reset!).  At this writing, our national debt stands at $21 Trillion and according to the Congressional Budget Office long-term outlook released in July 2018, the GOP tax cuts and bipartisan spending increases enacted in Fall 2017 will add at least $2.3 Trillion in the next ten years, and possibly as much as $5.1 Trillion (not counting extraordinary expenses that might be imposed by new wars, financial crises, an economic downturn, municipal pension failures or natural calamities).   What will be the impact on retirees over the next 15 years?  The Medicare Hospital Insurance Trust Fund is projected to run out in 2026 followed by the Social Security Trust Fund in 2032.  Those effects mean materially reduced benefits—unless of course the federal government comes to the rescue with emergency funding.

But here’s the rub.  Reduced government revenue combined with increased government spending also means growing annual deficits. In fact, the deficit could reach $1 Trillion as soon as next year and certainly not long thereafter. The big question is with short-term rates still just around 2%, what happens when they reach the mid-3% range, which the Federal Reserve is preparing us to expect?  Interest payable at 3.5% on debt of $25 Trillion will amount to $1 Trillion in and of itself. Interest payments as a percentage of the federal budget will grow, crowding out other expenditures including federal assistance to states and funding for social safety net programs. Where are the Social Security Rescue Funds supposed to come from especially if Washington will also be called upon to bail out failed municipal and state pensions?

To be counted among retirement’s last winners, you’re going to need to be self-reliant, confidently invested in a properly diversified nest egg prudently balanced between insurance and securities.

Learning how to shift your focus on portfolio balance is your indispensable first step.  Take it now.  Time is of the essence.