I have written about retirement before, even arguing “Don’t save for retirement” at times to make the point that saving for retirement is not about building a certain amount of net worth on which to retire. To reach your Point of Independence, it is much more important to focus on creating a recurring revenue model that generates a stable income for the rest of your life.
In the past, the company pension provided this income, and coupled with social security, retirees had confidence it would be there every month. The company hired professional investment managers to ensure they could meet the obligations. But in the last decade, pensions have been replaced by 401(k) plans and this change has put the retirement of millions of Americans at risk.
In a recent Harvard Business Review essay “The Crisis in Retirement Planning”, economist and Nobel Prize winner Robert C. Merton describes how dangerous the change in focus is to future retirees. He states, “the goal of most savers is to achieve a reasonable level of retirement income.” The modern 401(k) focuses on account balance and assumes that it will be easy to convert an account balance to an income stream. If you retired today with $1 million in your 401(k) and wanted to secure a stable, risk-free income for life, you might be able to generate $20,000 per year on a bond portfolio. Even with social security, this person just took a massive pay cut and probably will have to cut back on lifestyle or risk running out of money. Most people don’t realize the problem between the account balance approach and income replacement approach until it is too late.
Today the modern version of the 401(k) shifts the burden to the employee – a task most are not qualified to handle. But more tragically, the move shifts people away from focusing on creating a retirement income to focusing on growing their account balance. The question, “How much income will I be able to generate at retirement?” has been by replaced by “How do I invest my account to maximize growth?”
The current financial planning model relies on an account balance approach. Save this much, invest it wisely, focus on rate of return and hope it goes up in value. Hope is not a strategy we like. The Point of Independence approach focuses on creating a recurring revenue model that works just like having your own personal pension. Change your focus and you increase the likelihood of a worry-free retirement.
Contact me today at (404)257-3317.