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For Most Retirees, Simple is Best

old man
Kenny Luo

Suppose you had two choices for a retirement scenario: the first is that you owned $50,000,000 worth of real estate. The second is that you own $500,000 worth of real estate.

You’d pick the first, right?

Well, what if the $50,000,000 of real estate is worth so much because it’s located adjacent to a national forest, but the government says you can’t build anything on the land that will pay you rental income. So, that means you’re asset rich, but income poor.

Further, suppose the $500,000 worth of real estate (that’s the 2nd option, if you remember), paid you a monthly rental income of $25,000 (every month!!!). Hey, it’s my example…I can make it as whacky as I want to.

Well, neither of those extremes is likely – both would be nearly impossible. But my point is that having an asset (or assets) of a certain market value it’s not enough – you’ve got to have a plan for turning that asset into an income stream without ultimately cannibalizing the asset itself.

Fortunately, you can buy dividend paying stocks, interest bearing bonds, rent producing real estate and private businesses that do make profits and distribute income to you.

So then, is the goal to have as many income-producing assets as possible? Well, you’re getting warmer, but you’re not quite there yet.

Two things generally happen as we move through retirement – first, our capacity for complexity and risk diminishes and the likelihood of an expensive life event occurring increases. Both of these realities call for an optimization of benefits available in retirement.

Now, when I say benefits, we’re talking about third party payments made on our behalf to fund life events that are beyond our control. This often involves insurance, but it may also involve pensions and retirement benefits. We essentially purchase (at a deep, deep discount) the payment of large expenses in the event those expenses occur. This could be medical expenses or long-term care expenses or longevity (living too long!) expenses.

What’s needed is a simple balance of cash flow (that’s your retirement income) and the benefits (so that we don’t have to use our precious cash flow to pay for catastrophes or unexpected emergencies).

To provide cash flow, look at maximizing Social Security benefits (by waiting as long as possible to take them), required minimum distributions from IRAs and 401(k)s and other retirement accounts (beginning now at age 72), and guaranteed income annuities to provide a base of income. Beyond that, income from an income-oriented investment portfolio can add additional income but also take care to properly diversify and demand quality.

To provide benefits, look for creative combinations of life insurance, long-term care insurance and supplemental benefit insurance to pay for medical costs not covered by Medicare.

Remember – keep it simple and keep it safe. And I think you’re gonna like your results.

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.