headerimage3By: David Macchia | September 3, 2021

You’ve worked hard and saved. As you contemplate retirement, you’re feeling pretty confident about the future. After all, you’ve accumulated a healthy nest egg. It’s not surprising, therefore, that you believe your long-range financial security in retirement is assured. Hopefully, your confidence is justified. But the truth is, having accumulated a substantial lump sum may not afford you the long-term security you’re counting on.

In assessing one’s odds of actually attaining a financially secure retirement. It’s important to know what type of retirement investor you actually are. Let me offer you a framework to think about: To give yourself the best chance of achieving a comfortable retirement, start by assessing whether you’re a “constrained” investor.

To begin we have to focus on a critical question: How does the size of your investment portfolio compare to the amount of income you need to live on in retirement? The answer will vary from investor to investor, including even among people with identical amounts of savings. This is because of another important concept in retirement income planning, namely, your income “floor.”

 Your “floor” income consists of those sources of monthly income that are secure and payable to you for life. “Floor” income is hugely important because it’s the foundation of your retirement income strategy. Ideally, your “floor” would be large enough to cover your living expenses in retirement including your essential expenses e.g., housing, food, healthcare, utilities, clothing, etc., as well as your discretionary expenses. Discretionary expenses are the types of expenses that may create a lot of satisfaction and enjoyment in retirement, things such as travel, entertainment, dining out, going to the theater, making gifts to children, grandchildren, or charities, etc. 

Most people enter retirement with a measure of “floor” income in the form of Social Security. A far smaller segment of retirees will enter retirement with Social Security and a traditional pension – another source of guaranteed income for life.

Imagine an individual, we’ll call him Bob, who enters retirement with savings of $1 million. Bob will receive $2,700 per month in Social Security benefits plus another $2,500 per month from a pension. Bob’s income “floor” is the sum of the two: $5,200 per month. If Bob’s living expenses are $6,000 per month, he’ll need to use his savings to cover his income “gap,” a relatively small $800 per month.

Now, consider another retiree, Irene. Irene has a nest egg identical to Bob’s: $1 million. She also has the same $6,000 in monthly living expenses. And just like Bob, Irene will receive $2,700 per month from Social Security. Unfortunately, however, unlike Bob, Irene’s “floor” stops at Social Security. She has no pension. The difference for Irene is the size of her income “gap.” Irene’s “gap” is $3,300 per month. That means her savings must work a lot harder than Bob’s. It also means that Irene will benefit from an investment strategy that seeks to mitigate certain risks that can damage Irene’s capacity to generate income.

The implication of the significant difference in the amount of “floor” income between Bob and Irene is profound when you consider Irene’s exposure to risks that can potentially wreck her retirement. Irene’s smaller “floor” means that she enters retirement with the need to cover a much larger income “gap.” This means that Irene is deeply reliant upon her savings to generate the income she will need in retirement. This reliance upon savings to produce the income that a retiree must have is a hallmark of the “constrained” investor.

The practical meaning for Irene is that she has little margin for error in terms of making investing mistakes. Therefore, Irene’s paramount investing priority must be to mitigate risks that can rob her of her ability to generate income. The truth is retirees face a wide variety of risks. I’m going to focus on one, however, that is particularly threatening. If you are a “constrained” investor. It’s a risk you need to understand and plan for.

Understanding Timing Risk

Imagine two retirees: Jan and Sue. They are financially identical, meaning that Jan and Sue have the same amount of savings and identical investment portfolios. Further assume that Jan and Sue each enter retirement and withdraw exactly the same amount of money to meet their similar living expenses. So, what’s different? Just one thing: the timing of when Jan and Sue retire. 

Would you believe that if Jan retires on Jan. 1, and if Sue retires on April 1, Sue could lose nearly $1 million in total income compared to Jan? It’s true. I worked with the LIMRA Secure Retirement Institute (SRI) on an analysis that demonstrates that even three-month differences in retirement dates can create vast disparities in retirees’ ability to generate income. My company collaborated with SRI on the production of a short movie entitled, Understanding Timing Risk: The Story of Ten Retirees. The movie shows how 10 financially identical investors, individuals whose retirement dates are separated by a calendar quarter, end up with vastly different financial outcomes in retirement. 

The spectrum of financial results for these ten retirees is remarkable… and disturbing. One retiree winds up destitute, running out of money entirely during retirement. Yet, another retiree enjoys 30-years of inflation-adjusted income, plus finishes retirement with a pile of cash totaling $2.6 million.

I believe there is no risk more important for retirees to understand and plan for than Timing Risk. Next month I’ll reveal the steps you can take to mitigate Timing Risk in order to make your own retirement more secure. In the meantime, if you’d like a copy of the movie Understanding Timing Risk, email and I’ll be happy to send you a free copy.



David Macchia is Founder of Wealth2k, Inc. He is an author and entrepreneur focused on retirement security. David is the developer of the widely used retirement income solution The Income for Life Model® as well as the recently introduced Women And Income™, the first retirement income solution developed for women investors.

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