How To Retire With The Odds In Your Client’s Favor

By Stephen Kelley

"We cannot solve our problems with the same thinking we used when we created them."

This nugget of pure gold from Albert Einstein is one of my favorite quotes, and that's saying a lot. It's the key to creating a good income plan; when you come right down to it, it's probably the key to solving any thorny problem.

I originally wrote this column a few years back, but felt it was well worth repeating now.

It's no secret that the retirement system in the United States is a complete mess. It's working great for highly paid individuals who were able to amass a small fortune while raising families, paying off mortgages, sending their kids to college, and weathering an unpredictable and capricious stock market.

Since we boomers graduated, the landscape has shifted beneath our feet. According to the Employee Benefit Research Institute, in the early 1970s, more than 80% of workers with an employer-sponsored retirement plan had a defined-benefits pension. They did not have to worry about investing wisely while working, or trying to determine a "safe" amount to withdraw once retired. All of that risk was shifted to the pension. All the worker had to do was put in their time and contribute, knowing his or her income was secure for life after putting in a lifetime of dedicated service.

The average retirement was 13 years, and income was predictable. That all changed in the early '80s with the advent of the 401(k), which was originally created as a tax dodge for highly compensated individuals, not a model for our retirement system.

Nevertheless, by the 1990s, we were all in with the new system and tens of millions of people were pouring trillions of dollars into the markets. Today it's estimated that more than $24 trillion is invested in these plans. This flood of new investments supercharged the markets to over 1,600% growth between 1980 and 2000. Planning techniques like "Monte Carlo Planning" and "the 4% Rule" came into fashion, and everyone felt secure in the knowledge that markets would return 18% annually forever and life was good.

Then reality crept in. Today, only about 30% of workers who participate in an employer-sponsored plan have a defined-benefits pension. At the same time, the average length of retirement went from 13 to 18 years. That's the average, meaning today's retiree has to plan for a potential 36-year retirement. At the same time, the markets have destroyed nearly half our wealth, twice in one decade, and only 4% of those without pensions have adequate savings to ensure a safe and secure retirement, representing if not the most, one of the most serious financial crises in our nation's history.

But the financial industry refuses to change, or even recognize that there's a problem. And who could blame them? It is estimated that Wall Street pulls 2.5% to 3% annually out of this $24 trillion golden goose. That's $600 billion to $800 billion a year! They have no incentive to change at all - in fact, just the opposite.

So instead of looking for a workable alternative, we are told to just live on less, take Social Security earlier, and wait to withdraw only our required minimum distributions from our qualified investments. The 4% rule of yesteryear is the 2.8% rule of today. This is truly a "less now, more later" kind of thinking that translates to a "less now, less always" reality.

The truth is, the only people truly benefiting from today's financial system are those who work in it and the very highly compensated. The vast majority of people getting ready to retire are taking it on the chin. Even worse, Wall Street and the financial-services industry use the proceeds from our money to lobby Congress and fuel a media machine to keep us trapped in the status quo.

The fix? It's time to change our thinking. To move into a "more now, more later" lifestyle, you need to turn your planning approach on its head. How? By restoring a stream of reliable, safe and predictable income that is guaranteed to live as long as you do. It's the only answer.

Here's the really cool part. Actuarially, we are much less likely to be here in our 80s and 90s. However, we could be, so we have to plan for it. But if done right, we can leverage the lower likelihood of needing it, thereby significantly reducing the cost, but only if we spread that among a large group of people. Otherwise, we have to absorb 100% of the very real risk of running out of money.

By using and maximizing assets and income streams that spread the longevity risk and are guaranteed for life, we can remove the number-one threat to our retirement: outliving our money due to the uncertainty of our life span. It starts with making smart decisions about Social Security, then pensions (if you are one of the lucky few who still has one) and, if necessary, income annuities. These are the only things available that will guarantee lifetime income and remove the longevity risk, thereby restoring the balance and security enjoyed by our parents.

Then, once we have that taken care of, it's possible to really plan for a known time horizon. By doing this, you remove the need to spend only 2.8%, sometimes getting as much as 6% to 8% a year, or even more. From day one. That truly is "more now, more later."

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, N.H., he services Greater Boston and the New England areas. He is author of five books, including "Tell Me When You're Going to Die and I'll Tell You How Well You Can Live," which deals with the problem that unknown lifespans create for retirement planning. It and his other books are available on Amazon.com. His radio program, The Free Money Guys, can be heard every Sunday at noon on 980 AM WCAP. He also conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com.