I remember reading in some dusty old tome on financial planning (I believe it was from the 1980’s roundabout) about choosing objectives that you want to accomplish.
These objectives could range from protecting your family from pre-mature death (using life insurance) to protecting yourself and spouse from living too long (using annuity lifetime income payouts)… and tons of other objectives in between.
And it got me thinking about trade-offs.
Having kids is one trade-off.
You get to enjoy their company and if you raise them right and teach them independence, hopefully they will be able to take care of you when you are older. So there is more than just an emotional gain for having kids. It could be a source of security later on as well.
The trade-off is you will sacrifice on other things with kids. The big ones… sleep, money, free time, and flexibility.
As a father of 5 I understand this.
And it’s no different with retirement planning.
Here are a couple of trade-offs you will face preparing for retirement (and when you are already retired).
Income now from Social Security versus Income later from Social Security.
If you draw early at age 62 you’ll get less (around 25%-30% below your full retirement age). If you delay you’ll get more. You can delay up to age 70 if you like.
But you have to have another source of income while you are delaying. This could mean spending down your savings during that time. Or it may mean working during that time by delaying your retirement.
That’s the trade-off.
How about… Annuity guarantees versus Growth
Annuities can provide lifetime income guarantee options. This helps protect you from outliving your resources.
However, the trade-off is the funds in an annuity probably won’t grow very much. And once the funds are annuitized (turned into an income stream) they typically won’t grow at all but will be a level income benefit.
At the other end is growth potential. This is usually achieved through an investment portfolio. Depending on what it is invested in it could have a strong growth potential.
But there are no guarantees of that, and it could actually go down in value during a market correction.
How about… Annuity income guarantees versus flexibility of an investment portfolio
The income guarantee is an obvious benefit. But the trade-off is there is less flexibility compared to an investment portfolio.
An investment portfolio can be liquidated for cash if you need it. You can re-allocate it to different mutual funds. You can do all this without surrender charges for making changes.
With an annuity income guarantee the income is locked in. In most cases, no changes can be made.
The moral of the story?
Define your objectives and see which trade-offs you’re comfortable with missing out on.
You can do this in life for anything. It’s not just for planning for retirement.
But for retirement, consider these examples…
Want growth potential with liquidity AND you don’t care about additional income guarantees? Then consider a diversified portfolio with no annuities in it.
Want additional income guarantees on top of what Social Security pays you AND you don’t need access to a lump sum? Then consider the additional income an annuity could provide.
Don’t mind working longer up to age 66 or even 70? Then consider delaying your Social Security so you can have a higher benefit for the future.
Find the things that you don’t mind trading off. That makes the benefit you get feel all the more better.
For most people a combination of the above options will make them the happiest. Some income guarantees, some growth potential, and delaying a few years beyond 62 before drawing Social Security.
You got to find the combination that works for you to take care of your needs in retirement over the next 20-30 years.
P.S. If you need help figuring this out, go here to schedule a no-obligation chat with me.