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A path to safety and security



Somewhere along the way, pension planning and especially pension income planning came completely off track. However, there is a way that you can fix it yourself and that is by learning a simple method to create your own pension. A pension income flow that deposits a certain amount of money in your bank account each month as a clockwork. <! – ->

But first, a disclaimer: the information below contradicts conventional wisdom when it comes to planning for your retirement. I have been directly involved in all aspects of the pension planning industry (equities, qualifying plans, all types of annuities, insurance, discounted cash flows, bonds, mutual funds, separately managed accounts, limited partnerships, etc.). I do not want to impress you but just to let you know that I have peeked behind the curtain, seen the magician and I am not impressed.

Now that we've got it out of the way, I can spend less time talking about what's wrong with retirement planning and more time talking about what we can all do better. What we can do better for our customers, for ourselves and for everyone we know.

When exactly did this train wreck happen?

I've done my homework and it's really hard to pinpoint the exact date when things went wrong, however, the problem really started to raise its head sometime in the early 1980's. That's when corporate boards and executives decided that it would really be in their employees' best interests (pushing each other with elbows) to adopt defined-contribution plans (go into 401k) instead of the defined-benefit plans (or more commonly known as pensions) that had been the norm. during the last 60 years.

So this immediately placed the responsibility for providing a pension income entirely on the shoulders of the employee.

Do not get me wrong. I am very much in favor of personal responsibility and taking the opportunity to control your own destiny. <! – ->

You are responsible for your pension income

In other words, I would never suggest that my retirement or yours is the responsibility of an employer or the government for that matter.

But …

The problem with almost all the advice that people have been given in recent decades is that it relies heavily on a "pie in the sky" return. adoption. Most financial "gurus" will suggest that if you save at least 10% of your gross income and earn an average return of 10% then you are done.

I do not agree with that assumption.

the erroneous logic, you are too strongly dependent on the interest you earn during your working life. I hate to tell you the news, but you have absolutely no control over that speed. Also, at an average of 10%, you have to do something similar to a very successful win at the blackjack tables in Vegas.

And the one who came up with some static percentage as a "rule of thumb" for how much of your income should be spent on pension savings? This figure can vary wildly depending on how much money you earn, how much income you need later and what your goals are.

This is perhaps the weakest link in the strategy.

Honestly, this is just the wrong way to solve the pension income problem. <! – ->

So what is the correct way to calculate this?

I'm glad you asked.

It's actually quite simple and it's a return to a bygone era when people actually used absolutely to plan for the future.

Okay, I'm sarcastic … I promise (scout's honor)

What's old is new again.

I suggest how you really should plan for your future retirement is to find out how much money you need to live comfortably in the future. How do you do it? Well, the best method is to be realistic. <! – ->

Decide what expenses you get – to the best of your ability, how much you want for leisure, etc. Then you will only return to how much you need to save to create that income.

You do not have to be a math guide like our resident mathematician, Brandon Roberts. In fact, you can use a few different online calculators to help you and get your answer in minutes.

Simple Strategy for Finding Your "Number"

1. Go to https://annuityfyi.com – Fill in your home country, choose a birthday that reflects the age you would be today if you were to retire. It's probably a bit confusing but for example I use 2-26-1953 as my date of birth because I plan to retire when I'm 67 and I would like the calculator to show a number based on that age (the calculations are based on your life expectancy ) and the monthly income I want when I get there.

2. Press "Next step" and a new page will appear with a few more boxes to fill in. Scroll down to the option that says " Solve for" . Then use the down arrow to toggle the "Monthly Income" option to resolve. For the example here, I chose $ 5,000 per month and my income start date is 12-20-2020.

Your screen will look like this after making all of the above selections:


Catalog

3. After pressing the Calculate Quotation button, you will have the "number" that you must have in your bucket to generate the income you want. If you look at the top line, you will see that you must deposit (pay a premium of) $ 1,036,307 today to ensure that you receive a $ 5,000 monthly income for your life beginning in December 2020 and that your beneficiary will get a refund (installments) of all unpaid premiums that you deposited when you die.

The other figures on the lines below are for other insurance companies. We do not know which companies are quoted here because you have to go further in their process to be aware of that information. But it is worth pointing out that there is a difference. For example, the third option down would cost almost 40,000 more to guarantee the same income flow for life.

4. However, this is only if you retired today . So in other words, you're not quite ready . Click on the link to go to a fairly generic website, Financial Calculators, and you will see the TVM calculator in front of you.

5 . Do not be intimidated. We need to do some math here, but all we do is plug in numbers into the Time Value of Money calculator to tell us how much we need to spend each year provided we take a very conservative 4% inflation over the next 25 the years. Conservative in that we will probably end up with a higher annual savings number than we really need.

You should see this when you first load the page: [19659008]

6. Now we'll take the amount from the annuity quote we dug up on AnnuityFYI.com and plug it into the FV field (future value).

7. In the field of interest in 4. This is the interest rate that we use as our return to get us to the "number" over the next 25 years. We use 4% because it is a super-conservative number that most actuarial tables trust to make safer assumptions and we are comfortable with that. Here is exactly what I typed into the calculator to get the results.

8 . Then we enter the number of periods. In my example, I used 25 periods because I performed the calculation on myself. I am 42 and plan to retire at age 67, thus 25 years.

9. Finally, we click on the button marked "PMT" and the number we need to save on an annual basis to get us to our number, 1,036,307 dollars will appear in the PMT field. In my example, it's $ 24,883.

So what does all this tell us …

It tells us that we should be serious about cleaning up some money to take care of ourselves along the way. To drive home that point, I first performed this calculation when I was 35, and with the annual savings needed to achieve the same result, it was only $ 14,501. The waiting cost is expensive and becomes exponentially more every year.

Many traditional types of financial planning will suggest that my method is rough, rough and far too simple.

They will say that with 4% the assumption is a far too conservative number and that the market has on average been closer to 8% throughout history. (If you think you should check out my post on compound annual growth rates.) I mean you can stop saving too much money.

As an economist for the last 20+ years, I have never had anyone tell me that they have saved too much.

But what if you assume a return of 8% and only 6% on average?

I say what … you either do not retire when you wanted to, or you accept a lower standard of living in retirement. Those are your only two options at the time.

I do not know about you, but I would rather imagine earning a lower interest rate on my savings during my lifetime and be pleasantly surprised when I do better. If I plan 4%, I save more money than a guy who plans 8%. The engine in my plane is powered by my savings and is not dependent on an unpredictable return.

In that scenario, who has more control?

I do. [19659008] I can control how much I save; he can not control what his return will be.

So the next time you hear some talking heads talking about how to plan for your retirement, remember that the way that was done many years ago is still the way to go. Plan what you know you need to generate the income you want and then save enough money based on a conservative return to easily get you to your destination. ]

That's it.

Then you do not need a company pension, you have saved enough money to make your own pension work every time. This type of planning does not rely on overly complicated models based on probability and statistics.

There will come a day when we all have to generate income from our pension savings, it is not likely – it is a security. And it's much better for you to have a certain strategy to get you there.

If you want to learn more about how we help people plan this, contact us – we are happy to help.


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