Taking the Flooring Approach for Retirement
Planning for retirement is difficult, primarily because you don’t know how the economy will change. The stock markets fluctuate, different laws are passed over time, and that makes speculation and preparation all the harder.
What is certain is that saving up to meet your goals for the twilight years will rarely go according to plan.
If your intention is to maintain a high-risk investment portfolio to generate retirement income, it is difficult to speculate how long that money will last. Bill Bengen, a financial planning practitioner, recommends a 4 percent withdrawal method.
This takes into account the average return as well as the sequence of returns. Once you start taking withdrawals in retirement, it is important to note that bad returns can deplete a portfolio extremely quickly.
Once most of us get to retirement, running out of money probably isn’t an option. We would like some form of safety net before even considering retirement. Most retirees rate a desirable quality of life in their twilight years as having income to cover their basic needs like housing, health care, food, and taxes.
What Is The Flooring Approach?
The gist of the flooring approach is to first lay the foundation for basic living expenses. This essential approach requires creating a secure retirement income rather than investing in a high-risk portfolio.
The first thing to do will be to determine the basic expenses per year during your retirement and making sure you’ve covered these mandatory expenses. For other expenses, you can still invest in the markets to create some side income for your retirement portfolio.
To generate this secure income, prospective retirees will have to look outside of the stock market. Using the flooring approach, retirees can lay the foundation with pensions, annuities, and bond ladders. But with the low interest rates in the current markets, building a large floor becomes more difficult.
For most retirees, social security provides the natural floor. Generally considered a secure form of income, social security helps protect retirees from complete retirement failure. Even when a retiree runs out of assets to invest, this is the safety net.
It’s Not For Everybody
Generally if you are worried about longevity risk, it is more appealing to use the flooring strategy. Annuities and lifetime income sources become more valuable the further you get into retirement.
However, you have to be careful of committing yourself to just one lifetime income option. The common downside of certain annuities is the restrictions on liquidity and the fees that come with trying to cash in early on the policy.
Make It Work For You
The smart way to do it will be to consider diversification. Look at working with a financial advisor who can build out a comprehensive retirement plan. And be prepared to ask the tough questions regarding the annuity cost and how to create a secure nest egg for yourself.
In summary, a solid flooring approach will allow your retirement portfolio to last a long time. It will create an income flow to meet your basic expenses, and give you the reassurance of security as well.
And as always, if you need advice on creating your flooring approach, the Financial Helpers are ready to assist you.
