Having enough to live on until the day you die – that has to be the clear and unfettered goal of every retiree. Only when that objective is secure can we move on to grander visions of a golden retirement, or passing on an estate.
As they say in Alien: “All other priorities are rescinded.”
I’m dealing with this now as a close relative of mine needs help to make safe her income. She’s up against the ravages of inflation, a Darwinian stock market, sharky financial advisors, and a risk tolerance lower than a nun in Caesar’s Palace.
She doesn’t have a defined benefit plan, or sources of income beyond the state pension, and her pensionable assets are modest.
Making a happy retirement out of that lot can be done but it will be touch and go. We will have to put the chips on the right squares and there will be no second throw of the dice.
What really matters?
Daunting choices and goals have been swirling around my relative, leaving her frozen in the fog. What’s needed is a retirement plan filter to help her see clearly.
Here’s what I’ve come up with:
- How much you got? In pensionable assets and any other income that will help your retirement. For many people, “other income” will just be the state pension.
- How much you need? What’s the minimum amount you can live on and be reasonably happy? I’m not talking breadline bleakness here but jetting to Capri on a whim is probably out, too.
- How much you want? Okay, here’s where those Capri weekenders come in. What other lifestyle goals and dreams do you have. For example traveling the world, passing on an inheritance, and so on.
Once you have the answers to these questions you can set about your strategy.
Bernstein counsels a two-part retirement strategy:
1. Create a minimum income floor – This aims to meet your basic retirement needs for the rest of your days, and is generated using near risk-free assets.
2. Create a risk portfolio for the fun stuff – Legacies, Gucci bags, and bionic parts are funded by (hopefully) the rise in value of this portfolio. As the name suggests, you can afford to take more risk here because your basic needs are already secure. Though some of the risk portfolio should always be in cash to handle emergencies.
Critically, by ring-fencing the two parts of your retirement plan, you won’t endanger your survival income by taking risks in pursuit of the good stuff.
In my next post, I’ll take a look at the best options for nailing down that all-important income floor.
Take it steady,