End of Decade Closes with 3 Surprises for Retirement

An impressive year in the stock market concluded the decade with a bang, which means it is a good time to ask yourself, “Are my retirement plans better off in 2020 than they were a year earlier?”

Along with the Dow Jones climbing above 28,000, we have witnessed two other noteworthy events: Advisory firms are still trying to convince you that the best retirement plan is to simply draw down your retirement savings while offering strategies to help you spend that stock market windfall in retirement. And the government has made it easier for employees to turn their savings into pension-like lifetime income.

All of these events become significant to you depending on how you view your retirement strategy:

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• Do you plan on drawing down your savings to cover your expenses in retirement and hope your nest egg lasts longer than you do? (This approach is known as “de-accumulation” — or the opposite of accumulation.)
• Or do you want to create a retirement income plan to generate the income you need that lasts your lifetime, no matter how long that may be? We call it “income planning.”

Development No. 1: Congress Actually Agreed on Something!

It is called the SECURE Act. Congress, and the president approved legislation (which I have long argued for) to allow 401(k) plans to more easily add annuities as a retirement plan option. Under the SECURE Act, retirement plans now have a “safe harbor” from penalties if annuity providers don’t fulfill their contractual obligations and stop making annuity payments. (I recommend only the strongest and highest-ranked providers.) This new law, therefore, will encourage more employers to offer annuities and the potential of lifelong income, to the benefit of their workers.

The legislation also requires employers to show 401(k) participants once a year how much each employee’s savings would produce in terms of retirement income. That is an important bit of information — and something anyone can learn by putting their own numbers into the Income Power calculator at Go2Income.

One part of the SECURE Act that people are grumbling about is a change of rules that will allow the government to collect taxes more quickly on 401(k) and IRA savings left to heirs, but there are ways to mitigate that situation. Long before the act became law, I suggested a different way to provide a legacy for your heirs. It was to “die broke” in your 401(k) to help your heirs avoid those taxes, and to “die rich in your personal savings, which mostly escape taxes at your passing. (By “die broke” I mean that in the long run, the income from qualified savings is coming from annuity payments and not withdrawals.)

Overall, the SECURE Act is good for people planning for retirement — an instance of government representatives working for our benefit.

Development No. 2: Robo-Income Solutions Announced – But Are They New?

The new year has brought the usual onslaught of new product and service offerings from financial companies, particularly targeted to boomers. One large provider is offering a “robo” (do it yourself) alternative for what I consider a very traditional de-accumulation planning method. It consists of asset allocation, withdrawals from savings and Monte Carlo simulation of results. That old asset allocation method is the popular approach of dividing your savings into categories that usually include stocks, bonds and cash, and stress-testing to see how long withdrawals of these savings will last.

The problem, as I have often said in this space, is that asset allocation does not start with the most important aspect of retirement — your income. By not considering all the ways of generating income, (versus savings) including annuity payments, this method shifts the risks to you. And it misses out on a lot of tax benefits.

As an example, one new robo product is described as “A new way to pay yourself from your portfolio.” However, the challenge is not addressed just by more asset allocation. Robo-income planning, particularly with low fees, is good because it gets investors involved in their own planning. But the best robo plans, I believe, are those that move you away from de-accumulation and toward true income planning, which helps you get the most retirement income from your savings.

Development No. 3: Market Hits a High – How Much Better Off Are You?

To answer that question, we ran some Income Power reports as of year end 2019 and 2020 for some representative ages and savings amounts. The answer was somewhat startling. Most of us are only slightly better off than we were a year ago. That’s because:

1. We were not invested 100% in the stock market.
2. Interest rates on other financial products fell over the year.

The result: Despite the stock market’s boisterous bull run, if you’re like most people, your Income Power (the risk-free income you could purchase with your savings) probably grew in the last year — but only by a small percentage.

After seeing that, the only regret for some is that perhaps they didn’t invest enough and missed the boom in the market. However, if they decide to try to make up for it this year by doing something extreme, the next regret for many retirement savers may be overinvestment as the market corrects. I won’t try to predict the top or the bottom, and you shouldn’t either.

That’s why an Income Allocation plan works for most people, especially retirees. As I wrote in “Prepare for Detours in the Market: Manage Your Plan in Real-Time,” severe market drops don’t materially affect the planned income of those who follow an approach of income allocation.

How These 3 Events Tie Together

• New legislation moving 401(k) plans to a greater access to income annuities.
• New financial products often follow the old path of de-accumulation and not income allocation.
• Market results barely moved future retirement income.

To sum it all up: My observation is that income/income/income is the answer to a secure retirement.

I invite you to visit the Income Allocation Tool at Go2Income to start your plan, ask questions and then, make some decisions about what is best for you and your family.