You know about the Three R’s of schooling—reading, ’riting and ’rithmetic – that continue to form the foundation of education even as it becomes much more complex and sophisticated.
There are also “Three L’s” that are just as foundational as you plan for retirement: Lifetime Income, Liquidity and Legacy.
These Three L’s address your objectives, and will ultimately drive your investment strategies and tactics. Just like a business plan, if you prepare and decide first on the objectives of the Three L’s¸ you will significantly improve your chances for a successful retirement.
Lifetime Income is the goal you should look to secure first. Your plan should ensure that your income continues year after year, even if it requires you to adjust the numbers so that you live on less, and/or your legacy to your heirs is reduced. You needn’t hit this target when you retire, but should have a plan that gets you there by the start of Stage Two of your retirement.
Most people typically worry less about dying after they retire than about running out of money. That’s why it’s essential to secure income for the rest of your life, no matter how long (rather than devising a plan that will provide income only for your anticipated, but unknown life span). Your Social Security payments and any pension benefits may be the base for this number.
Liquidity involves the resources that can be readily converted to cash to meet expenses that go beyond those supported by your Lifetime Income. That cash can come from bank accounts, a Roth IRA, or even equity in your home. In retirement, your costs for unreimbursed medical expenses, a caregiver or other surprise events—such as learning you need to replace the roof—could be substantial. A cash cushion will eliminate some worries about whether your money will last through retirement.
A legacy could come from liquidity that you don’t use during your lifetime, or it might be a financial asset dedicated to the legacy, e.g., a life insurance policy. Money invested in stocks and bonds outside your rollover IRA or 401(k) is a good source for an inheritance because it receives favorable income tax treatment at your passing and shifts investment risk to your heirs, who typically will have more years to deal with it than you do.
Legacy is the last goal for an obvious reason: Take care of yourself and your spouse with income and liquidity to ensure a reasonable retirement—and only then consider an inheritance to the kids and grandchildren.
Set achievable goals, then develop tactics
If you plan for the Three L’s and you discover you haven’t come up with enough Lifetime Income or Liquidity, make adjustments. When you are satisfied that the numbers add up, you can begin to look at the tactics for achieving your goals.
One product that adds Lifetime Income to your plan are income annuities. They are the only financial products that guarantee income for the rest of your life -- similar to Social Security or a pension. An immediate annuity can supplement your income as soon as you retire; a deferred income annuity offers payouts at an age you choose. Of course, you need to look at the impact on liquidity or legacy.
No matter what solution best applies to your specific circumstances, understanding the Three L’s of Lifetime Income, Liquidity and Legacy will help you develop your retirement plan -- and select the right set of strategies and tactics.